Question

Consider an investment that pays $12.76 in year 1, $5.35 in year 2, and then stabilizes...

Consider an investment that pays $12.76 in year 1, $5.35 in year 2, and then stabilizes at a stable growth of 2% every year forever after that This firm has an interest rate (required rate of return) of 10%. What is the present value of this investment opportunity? Give your answer to two decimals

Homework Answers

Answer #1
WACC= 10.00%
Year Previous year FCF FCF growth rate FCF current year Horizon value Total Value Discount factor Discounted value
1 0 0.00% 12.76 12.76 1.1 11.6
2 12.76 0.00% 5.35 68.213 73.563 1.21 60.79587
Long term growth rate (given)= 2.00% PV= Sum of discounted value = 72.4
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
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