Question

Horizon Value

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

	Actual 2013	2014	Projected 2015	2016
Free cash flow	$616.04	$676.72	$716.77	$766.94
(millions of dollars)

Growth is expected to be constant after 2015, and the weighted average cost of capital is 12%. What is the horizon (continuing) value at 2016 if growth from 2015 remains constant? Round your answer to the nearest dollar. Round intermediate calculations to two decimal places.

Answer 1

Step-1, Calculation of the Growth Rate

Here, we have Free Cash Flow in Year 2016 (FCF₂₀₁₆) = $766.94 Million

Free Cash Flow in Year 2015 (FCF₂₀₁₅) = $716.77 Million

Growth Rate = [(FCF₂₀₁₆ - FCF₂₀₁₅) / FCF₂₀₁₅] x 100

= [($766.94 - $716.77) / $716.77] x 100

= [$50.17 / $716.77] x 100

= 7.00%

Step-2, Calculation of Horizon (Continuing) Value

Free Cash Flow in Year 2016 (FCF₂₀₁₆) = $766.94

Growth Rate (g) = 7.00%

Weighted Average Cost of Capital (WACC) = 12.00%

Therefore, the Horizon (Continuing) Value = FCF₂₀₁₆(1 + g) / (WACC – g)

= $766.94(1 + 0.07) / (0.12 – 0.07)

= $820.63 / 0.05

= $16,413 Million

“Therefore, the Horizon (Continuing) Value at 2016 = $16,413 Million”