Question

1.

Horizon Value of Free Cash Flows

Current and projected free cash flows for Radell Global Operations are shown below.

	Actual		Projected
	2015	2016	2017	2018
Free cash flow	$611.76	$672.44	$712.49	$769.49
(millions of dollars)

Growth is expected to be constant after 2017, and the weighted average cost of capital is 11.85%. What is the horizon (continuing) value at 2018 if growth from 2017 remains constant? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to the nearest whole number.

$   million

2.

Declining Growth Stock Valuation

Brushy Mountain Mining Company's coal reserves are being depleted, so its sales are falling. Also, environmental costs increase each year, so its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 8% per year. If D0 = $5 and rs = 12%, what is the estimated value of Brushy Mountain's stock? Round your answer to the nearest cent.

$  

3.

Value of Operations

Kendra Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 8%. The company's weighted average cost of capital is 16%.

What is the terminal, or horizon, value of operations? (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2.) Round your answer to the nearest cent.

$   

Calculate the value of Kendra's operations. Round your answer to the nearest cent. Round intermediate calculations to two decimal places.

$  

Answer 1

1-	Horizon value	free cash flow in 2018/(WACC- growth rate)	769.49/(11.85%-8%)	19986.75
	growth rate =(free cash flow 2018/free cash flow 2017)_1	(769.49/712.49)-1	8.00%
2-	value of stock	expected dividend/(cost of equity-growth rate)	4.6/(12%-(-8%))	23
	expected dividend	5*(1-8%)	4.6
3-	Free cash flow in year 3	year 2 free cash flow*(1+growth rate)	100000*(1.08)	108000
	terminal value	free cash flow in year 3/(WACC-growth rate)	108000/(16%-8%)	1350000
	Year	cash flow	present value of cash flow = free cash flow/(1+r)^n r= 16%
	1	80000	68965.52
	2	100000	74316.29
	2	1350000	1003270
	present value of cash flow		1146552