Question

The following table presents forecasted financial information for Financial Advisors Co.:

                                               2021    2022    2023
Projected EBIT                       $319    $347    $365
Earnings after tax                   $127    $217    $285
Free cash flow                        $109    $144    $152

Financial Advisors Co.’s WACC = 9%
Expected growth rate in FCFs from 2024 to infinity is perpetually 5%
What is an appropriate estimate of the company’s terminal value as of the end of 2020, using the perpetual-growth equation as your estimate?

Please note: For this problem, you only need to figure out the terminal value as of the end of 2020, not the whole company value.

Answer 1

Value of Terminal Value  = FCF 2024 / [ WACC - growth Rate ]

FCF 2024 = FCF 2023 * ( 1 + g)

= $ 152 ( 1 + 0.05 )

= $ 152 * 1.05

= $ 159.60

Value of Terminal Value  = FCF 2024 / [ WACC - growth Rate ]

= $ 159.60 / [ 9% - 5% ]

= $ 159.60 / 4%

= $ 3990

Value of terminal Value at 2020 = Terminal Value * PVF(WACC, n)

= $ 3990 * PVF(9%,3)

= $ 3990 * 0.7722

= $ 3081.01

Pls do rate, if the answer is correct and Comment, if any further assistance is required