Question

eBook Problem Walk-Through Problem 7-17 Value of Operations Kendra Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively, after the second year, FCF is expected to grow at a constant rate of 10%. The company's weighted average cost of capital is 18% a. What is the terminal, or horizon, value of operations? (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2.) Round your answer to the nearest cent. b. Calculate the value of Kendra's operations. Round your answer to the nearest cent. Do not round Intermediate calculations,

Answer 1

Calculate the terminal value as follows:

А В C D Е 90 Year Particulars Amount PVF @ 18% PV of cash flows $67,796.61 $71,818.44 $987,503.59 $80,000.00 0.847457627 $100,000.00 $1,375,000.00 1 Cash flow 91 2 Cash flow 92 0.71818443 2 Terminal value 93 0.71818443 Value of operation $1,127,118.64 94 Terminal value Value of operation $1,375,000.00 $1,127,118.64 95 a 96 b

Formulas:

А В Е Particulars Cash flow Cash flow Terminal value PV of cash flows Amount 80000 100000 (C92*(1+10%))/(18%-10%)1/(1+18%)^A93 C93*D93 Value of operation |-С93 PVF @ 18% 90 Year -1/(1+18%)^A91 C91*D91 -1/(1+18%)^A92 C92*D92 91 1 92 2 93 2 -SUM(E91:E93) 94 -B93 95 a -D94 -B94 96 b