Question

. A firm is expected to generate the following free cash flows over the next five years: Year FCF In millions32678.974680.3 . After that, the free cash flows are expected to grow at the industry average of 4.3% per year. Using the DCF model and a weighted average cost of capital of 13.6%, . what is the enterprise value of the firm? 53.2 67.5 78.9 74.6 80.3 PC)-1.136 1.136 1.136 1.136 0.136-0.043 1.136

hi please looking at this picture can someone explaim why the last cash flow is being discounted to year 4 when its year 5? please only answer if u can explain it well to someone that have no idea. otherwise i will have to report.

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Answer #1

From Year 5 there is a constant and indefinite growth of 4.3%

That means IN year 5 cash flow is 80.3

Year 6 cash flow is 80.3*(1+4.3%)
Year 7 cash flow is 80.3*(1+4.3%)2

and so on till infinity

For this we need to find terminal value whose formula = Free cash Flow at year 5/(Rate- Growth).= 80.3/(0.136-0.043)

This Terminal value is the value of firm at end of year 4 because the formula is used to calculate the Present value of all cash flows from the end of year 5 till infinity. This value is not for end of year 5.
Since the Terminal value is calculated at end of year 4 hence it is discounted for 4 years = 80.3/((0.136-0.043)*(1+1.1364)

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