Question

QUESTION 9 You expect Canyon Buff Corp to generate the following free cash flows over the next five years 5 3 4 Year 120 FCF (S millions) 75 84 96 111 Beginning in year six, you estimate that Canyon Buff 's free cash flows will grow at 5 % per year and that Canyon Buff's weighted average cost of capital is 15% (Hint use Excel to do the calculation) The enterprise value for Canyon Buff Corporation is S Instruction: Note the unit is million. Type ONLY your mumerical answer, NO S sign, and round to ONE decimal place. Again, the unit is million million.

Answer 1

To find the EV,

We find PV of FCF till year 5 by discounting with WACC

We know from year 6, the FCF would have a perpetual growth rate of 5%

The terminal value of this FCF is nothing but PV of a growing perpetuity. It can be calculated as follows

$Terminal value = \frac{FCF_{5} \times (1+terminal growth rate)}{WACC - Terminal growth rate}$

$Terminal value = \frac{120 \times (1+0.05)}{0.15 - 0.05}$

Hence terminal value = $1,260 million

Note that this value is as of year 5 and we need to discount it back to today's date by WACC

The following table shows all the calculations

Year	0	1	2	3	4	5
FCF (million)		$       75.0	$       84.0	$       96.0	$     111.0	$     120.0
PV of FCF		$       65.2	$       63.5	$       63.1	$       63.5	$        59.7
NPV of FCF till year 5	$     315.0
Terminal value						$ 1,260.0
PV of terminal value	$     626.4
EV (million)	$     941.4

Hence the enterprise value is $ 941.4 million