Question

Kale Inc. forecasts the free cash flows (in millions) shown below. Assume the firm has zero non-operating assets. If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2, then what is the firm's total corporate value in millions)? Do not round intermediate calculations. Year 12 Free Cash flow $50 $115 O a. $1,446 O b. $1,295 c. $1,833 d. $1,530 e. $1,682

Answer 1

The firm's value is computed as shown below:

= Free cash flow in year 1 / (1 + weighted average cost of capital )¹ + Free cash flow in year 2 / (1 + weighted average cost of capital )² + 1 / (1 + weighted average cost of capital )² [ ( Free cash flow in year 2 (1 + growth rate ) / ( weighted average cost of capital - growth rate ) ]

= - $ 50 / 1.11 + $ 115 / 1.11² + 1 / 1.11² [ ( $ 115 x 1.05 ) / ( 0.11 - 0.05 ) ]

= - $ 50 / 1.11 + $ 115 / 1.11² + $ 2,012.5 / 1.11²

= $ 1,682 millions Approximately

So, the correct answer is option e.

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