Question

River Walk Tours is expected to have an EBIT of $184,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $11,000, $1,500, and $13,000, respectively. All are expected to grow at 6 percent per year for three years. After Year 4, the adjusted cash flow from assets is expected to grow at 2.5 percent indefinitely. The company's WACC is 9.2 percent and the tax rate is 21 percent. What is the terminal value of the company’s cash flows?

Answer 1

Expected Free Cash Flow, FCF1 = Expected EBIT * (1 - tax) + Expected Depreciation - Expected Increase in NWC - Expected Capital Spending
Expected Free Cash Flow, FCF1 = $184,000 *(1 - 0.21) + $11,000 - $1,500 - $13,000
Expected Free Cash Flow, FCF1 = $141,860

Growth rate for next 3 years is 6% and a constant growth rate (g) of 2.50% thereafter.

FCF2 = $141,860.00 * 1.060 = $150,371.60
FCF3 = $150,371.60 * 1.060 = $159,393.90
FCF4 = $159,393.90 * 1.060 = $168,957.53
FCF5 = $168,957.53 * 1.025 = $173,181.47

WACC = 9.20%

Terminal Value at the end of Year 4 = FCF5 / (WACC - g)
Terminal Value at the end of Year 4 = $173,181.47 / (0.0920 - 0.0250)
Terminal Value at the end of Year 4 = $173,181.47 / 0.0670
Terminal Value at the end of Year 4 = $2,584,798.06

So, terminal value of the company’s cash flows is $2,584,798.06