Question

Problem 7-17
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 5%. 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. Do not round intermediate calculations.
$_________________

Answer 1

	WACC=	16.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	80000		80000	1.16	68965.5172
2	80000	0.00%	100000	954545.46	1054545.455	1.3456	783699.0599
	Long term growth rate (given)=	5.00%			Value of Enterprise =	Sum of discounted value =	852664.58

Where
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 2 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor