Question

Kendra Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 6%. The company's weighted average cost of capital is 14%.

1. What is the terminal, or horizon, value of operations? (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2.) Round your answer to the nearest cent.

   $  

2. Calculate the value of Kendra's operations. Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

Answer 1

	WACC=	14.00%
Year	Previous year FCF	FCF growth rate	FCF current year	a. Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	80000		80000	1.14	70175.4386
2	80000	0.00%	100000	a. 1325000	1425000	1.2996	1096491.228
	Long term growth rate (given)=	6.00%			b. Value of Enterprise =	Sum of discounted value =	1166666.67
Where
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 2 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor