Question

Value of Operations: Constant FCF Growth EMC Corporation's current free cash flow of $400,000 and is expected to grow at a constant rate of 4.5%. The weighted average cost of capital is WACC = 12%. Calculate EMC's estimated value of operations. Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

1). Value of Operations = [Current FCF * (1 + g)] / [WACC - g]

= [$400,000 * (1 + 0.045)] / [0.12 - 0.045] = $418,000 / 0.075 = $5,573,333.33

2). g = [FCF(2022) / FCF(2021)] - 1 = [$762.4 / $719.247] - 1 = 1.06 - 1 = 0.06, or 6%

Horizon Value = FCF(2022) / [WACC - g]

= 762.4 / [0.119 - 0.06] = 762.4 / 0.059 = 12,921.48, or $12,921 million

3). Share Price = D1 / [r - g] = $1.10 / [0.14 - 0.05] = $1.10 / 0.09 = $12.22

4). Required Return = Annual Dividend / Share Price = $4 / $40 = 0.10, or 10%