Question 4:
Current and projected free cash flows for ABC Inc. are shown here. Growth is expected to be constant after 2021, and the weighted average cost of capital is 11%. What is the horizon (continuing) value at 2022 if growth from 2021 remains constant?
Actual |
Projected |
|||
2019 |
2020 |
2021 |
2022 |
|
Free cash flow (millions of dollars) |
$606.820 |
$667.500 |
$707.547 |
$750.000 |
Solution: | |||
Horizon (continuing) value at 2022 | 15,900 | ||
Working Notes: | |||
Notes: | Horizon value is the present value of all the FCF after that period ,at end of calculated period | ||
First of all we calculate constant growth rate | |||
constant growth rate (g) = (FCF 2022 - FCF 2021)/FCF 2021 | |||
constant growth rate (g) = (750 - 707.547)/707.547 | |||
constant growth rate (g) =0.06 | |||
constant growth rate (g) =6% | |||
Horizon (continuing ) Value at 2022 = FCF 2022 ( 1 + g)/(WACC - g) | |||
Horizon (continuing ) Value at 2022 = 750 ( 1 + 6%)/(11% - 6%) | |||
Horizon (continuing ) Value at 2022 = 795/5% | |||
Horizon (continuing ) Value at 2022 = 15,900 | |||
Please feel free to ask if anything about above solution in comment section of the question. |
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Horizon Value of Free Cash Flows Current and projected free cash
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