Question

Yr FCF 1 8M 2 10M A firm expects the free cash flows listed above. After year 2, the firm expects free cash flows will continue to grow indefinitely at the industry average of 5%. The firm estimates its cost of capital to be 8%. If the firm has debt of 540 million and cash of $20 million, what is its enterprise value? Assume 10 million shares outstanding,

Answer 1

Free cash flow at the end of the year (FCF1) =$8 million

FCF2 = $10 million

After 2 yesrs, Growth rate(g) = 5% per year forever

WACC = 8%

Calculating Enterprise Value(EV) of Firm (amount in millions of $):-

$EV = \frac{FCF_1}{(1+WACC)^1}+\frac{FCF_2}{(1+WACC)^2}+\frac{FCF_2(1+g)}{(1+WACC)^2}*\frac{1}{(WACC-g)}$

$EV = \frac{8}{(1+0.08)^1}+\frac{10}{(1+0.08)^2}+\frac{10(1+0.05)}{(1+0.08)^2}*\frac{1}{(0.08-0.05)}$

EV = 7.40740740 + 8.57338820 + 300.06858711

EV = $316.04938271 millions

So, Enterprise Value of Firm is $316,049,382.71

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