Question

Unlevered Value

Richter Manufacturing has a 10% unlevered cost of equity. Richter forecasts the following free cash flows (FCFs), which are expected to grow at a constant 2% rate after Year 3.

	Year 1	Year 2	Year 3
FCF	$730	$760	$820

1. What is the horizon value of the unlevered operations? Do not round intermediate calculations. Round your answer to the nearest dollar.

   $   

2. What is the total value of unlevered operations at Year 0? Do not round intermediate calculations. Round your answer to the nearest dollar.

   $   

Answer 1

1)

Year 4 FCF = Year 3 FCF (1 + growth rate)

Year 4 FCF = 820 (1 + 2%) = 836.4

horizon value = Year 4 FCF / cost of equity - growth rate

horizon value = 836.4 / 0.1 - 0.02

horizon value = 836.4 / 0.08

horizon value = $10,455

2)

total value of unlevered operations = 730 / (1 + 0.1)^1 + 760 / (1 + 0.1)^2 + 820 / (1 + 0.1)^3 + 10,455 / (1 + 0.1)^3

total value of unlevered operations = 663.6364 + 628.09917 + 616.0781 + 7,854.9962

total value of unlevered operations = $9,763