Question

Lycan, Inc. anticipates that it will earn a firm free cash flow of $2,100,000 a year in 2019. The amount of free cash flows Lycan can generate since then will grow at 5% per year until 2022. The owner of the firm will retire in 2022 and sell the company. The comparable BITDA multiple for this type of company is 15x. Assume Lycan's EBITDA for 2022 will be $2,000,000. What is the current value of this firm if it's WACC is 12%?

Please show all work and please show all formulas used!

Answer 1

FCF2019 = $2,100,000
Growth rate for FCF until 2022 = 5%

FCF2020 = $2,100,000 * 1.05 = $2,205,000
FCF2021 = $2,205,000 * 1.05 = $2,315,250
FCF2022 = $2,315,250 * 1.05 = $2,431,013

EBITDA Multiple 2022 = Expected Value of Firm, V2022 / EBITDA2022
15X = Expected Value of Firm, V2022 / $2,000,000
Expected Value of Firm, V2022 = $30,000,000

WACC = 12%

Current Value of Firm, V2018 = $2,100,000/1.12 + $2,205,000/1.12^2 + $2,315,250/1.12^3 + $2,431,013/1.12^4 + $30,000,000/1.12^4
Current Value of Firm, V2018 = $25,891,257

So, current value of firm is $25,891,257