Question

eBook Horizon Value of Free Cash Flows Current and projected free cash flows for Radell Global Operations are shown below. Actual 2018 $611.74 2019 $672.42 Projected 2020 $712.47 2021 $762.34 Free cash flow (millions of dollars) Growth is expected to be constant after 2020, and the weighted average cost of capital is 11.25%. What is the horizon (continuing) value at 2021 if growth from 2020 remains constant? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to the nearest whole number million

Answer 1

1. Growth =(Free cash flow in 2021-Free Cash flow in year 2020)/Free cash flow in year 2020
=(762.34-712.47)/712.47 =7%
Horizon value =FCF in 2021*(1+growth)/(WACC -growth) =(762.34*(1+7%))/(11.25%-7%) =19193.03

2. a. Horizon Vaue =FCF year 3*(1+Growth)/(WACC -Growth)=40*(1+7%)/(13%-7%) =713.33
b. Current Value of operation =FCF year 1/(1+WACC)+ FCF year 2/(1+WACC)^2+FCF3/(1+WACC)^3+Horizon Value/(1+WACC)^3 =-20/1.13+30/1.13^2+40/1.13^2+713.33/1.13^3 =531.49
c. Intrinsic Value =(Current value -Debt-Marketable Securities)/Number of Shares =(531.49-100-10)/10=42.15