Question

A company is projected to generate free cash flows of $121 million per year for the next 3 years (FCFF1, FCFF2 and FCFF3). Thereafter, the cash flows are expected to grow at a 2.7% rate in perpetuity. The company's cost of capital is 8.1%. What is your estimate for its enterprise value? Answer in millions, rounded to one decimal place (e.g., $213,456,789 = 213.5).

Answer 1

FCFF1 = $121.00 million
FCFF2 = $121.00 million
FCFF3 = $121.00 million

Growth Rate = 2.70%
Cost of Capital = 8.10%

FCFF4 = FCFF3 * (1 + Growth Rate)
FCFF4 = $121.00 million * 1.0270
FCFF4 = $124.267 million

Horizon Value of Firm = FCFF4 / (Cost of Capital - Growth Rate)
Horizon Value of Firm = $124.267 million / (0.0810 - 0.0270)
Horizon Value of Firm = $124.267 million / 0.0540
Horizon Value of Firm = $2,301.2407 million

Enterprise Value = $121.00 million / 1.0810 + $121.00 million / 1.0810^2 + $121.00 million / 1.0810^3 + $2,301.2407 million / 1.0810^3
Enterprise Value = $2,133.0 million