Question

Horizon Value of Free Cash Flows Current and projected free cash flows for Radell Global Operations are shown below.

Actual 2016	2017	Projected 2018	2019
Free cash flow	$602.40	$663.08	$703.13	$759.38
(millions of dollars)

Growth is expected to be constant after 2018, and the weighted average cost of capital is 11.55%. What is the horizon (continuing) value at 2019 if growth from 2018 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 2019 (FCF₂₀₁₉) = $759.38 Million

Free Cash Flow in Year 2018 (FCF₂₀₁₈) = $703.13 Million

Growth Rate = [(FCF₂₀₁₉ - FCF₂₀₁₈) / FCF₂₀₁₈] x 100

= [($759.38 - $703.13) / $703.13] x 100

= [$56.25 / $703.13] x 100

= 8.00%

Step-2, Calculation of Horizon (Continuing) Value

Free Cash Flow in Year 2019 (FCF₂₀₁₉) = $759.38 Million

Growth Rate (g) = 8.00%

Weighted Average Cost of Capital (WACC) = 11.55%

Therefore, the Horizon (Continuing) Value = FCF₂₀₁₉(1 + g) / (WACC – g)

= $759.38(1 + 0.08) / (0.1155 – 0.08)

= $820.13 / 0.0355

= $23,102 Million

“Therefore, the Horizon (Continuing) Value at 2019 = $23,102 Million“