Question

A company forecasts its free cash flows (in millions) as shown below. If the company’s weighted average cost of capital is 10% and the free cash flows are expected to grow at a rate of 3% after Year 2, what is the company’s total corporate value, in millions?

Year	1	2
Free cash flow	-$50	$100

Answer 1

The company's value is computed as shown below:

= Free cash flow in year 1 / (1 + weighted average cost of capital) + Free cash flow in year 2 / (1 + weighted average cost of capital)² + 1 / (1 + weighted average cost of capital)² [ ( Free cash flow in year 2 (1 + growth rate) / ( weighted average cost of capital - growth rate) ]

= - $ 50 million / 1.10 + $ 100 million / 1.10² + 1 / 1.10² [ ( $ 100 million (1 + 0.03) / ( 0.10 - 0.03) ]

= - $ 50 million / 1.10 + $ 100 million / 1.10² + $ 1,471.428571 million

= $ 1,253.25 million Approximately

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