he free cash flows (in millions) shown below are forecast by
Serta Inc. If the weighted average cost of capital is 12% and the
free cash flows are expected to continue growing at the same rate
after Year 3 as from Year 2 to Year 3, what is the Year 0 value of
operations, in millions?
Year: |
1 |
2 |
3 |
Free cash flow: |
−$10 |
$43 |
$47 |
a. |
$1,524.14 |
|
b. |
$1,414.25 |
|
c. |
$1,277.98 |
|
d. |
$1,182.75 |
|
e. |
$1,327.54 |
Growth rate = [ CF3 / CF2 ] - 1
= [ 47 / 43 ] - 1
= 1.0930 - 1
= 0.0930 i.9.30%
PV of future CFs Year 2:
= CF3 / [ Req ret - Growth Rate ]
= $ 47 M / [ 12% - 9.30% ]
= $ 47 M / 2.70%
= $ 1740.74
Value of Operations: PV of CFs from it.
Year | CF | PVF @12% | Disc CF |
1 | $ -10.00 | 0.89285714 | $ -8.93 |
2 | $ 43.00 | 0.79719388 | $ 34.28 |
2 | $ 1,740.74 | 0.79719388 | $ 1,387.71 |
Value of Operations | $ 1,413.06 |
Option B is correct.
Pls comment, if any further asisstance is required.
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