Question

Suppose an analyst estimates that free cash flow will be $2.85 million in year 5. What is the present value of this free cash flow if the company cost of capital is 12%, the WACC is 7%, and the equity cost of capital is 15%? Round your answer to the nearest $1,000. An example answer would be 1,024,000.

Answer 1

Answer:

Present Value of Free Cash flow under WACC 7% = $2,032,000

Working Note:

Free Cash Flow =	$ 2,850,000.00
Cost of Capital =	12%
WACC =	7%
Equity Cost of Capital	15%
In decision making WACC should be considered.
Present Value Factor for year 5 = 1/(1 + r )^n
r = rate of return
n = number of years
Present Value Factor for year 5 = 1/(1 + 7%)^5	0.713
Present Value of Free Cash flow = 2.85M * 0.713	$ 2,032,010.61
Round off to neares $1000 =	$ 2,032,000.00

Particulars	Rate	PVF = 1/(1+r)^n	Free Cash Flow	Present Value	Present Value Nearest $1,000
[1]	[2]	[3]	[4]	[5] = [3]*[4]	[6]
Cost of Capital	12%	0.567	$ 2,850,000.00	$ 1,617,166.54	$        1,617,000.00
WACC	7%	0.713	$ 2,850,000.00	$ 2,032,010.61	$        2,032,000.00
Equity Cost of Capital	15%	0.497	$ 2,850,000.00	$ 1,416,953.70	$        1,417,000.00