Island Hotels, Inc. (IHI) forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$7 million (negative), but then its FCF will turn positive. At t = 2 IHI’s FCF will be $35 million, and at t = 3 IHI’s FCF will be $58 million. After Year 3, FCF is expected to grow at a constant rate of 5% forever. If IHI’s weighted average cost of capital is 19%, what is the firm's value of operations, in millions? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.
Step-1, Calculation of the Horizon Value (HV)
Free Cash Flow in Year 3 (FCF3) = $58 Million
Growth Rate after 3rd (g) = 5% per year
Weighted Average Cost of Capital (WACC) = 19%
Therefore, the Horizon Value (HV) = FCF3(1 + g) / (WACC – g)
= $58 Million(1 + 0.05) / (0.19 – 0.05)
= $60.90 Million / 0.14
= $435.00 Million
Step-2, Calculation of the firm's value of operations
Firm's value of operations is the Present Value of the free cash flows plus the present value of the Horizon Value discounted at WACC
|
Year |
Cash flow ($ in Million) |
Present Value factor at 19% |
Present Value of cash flows ($ in Million) |
|
1 |
-7.00 |
0.84034 |
-5.89 |
|
2 |
35.00 |
0.70616 |
24.72 |
|
3 |
58.00 |
0.59342 |
34.42 |
|
3 |
435.00 |
0.59342 |
258.14 |
|
TOTAL |
311.39 |
||
“Therefore, the firm's value of operations will be $311.39 Million”
NOTE
The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.
Island Hotels, Inc. (IHI) forecasts that its free cash flow in the coming year, i.e., at...
Island Hotels, Inc. (IHI) forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$7 million (negative), but then its FCF will turn positive. At t = 2 IHI’s FCF will be $35 million, and at t = 3 IHI’s FCF will be $58 million. After Year 3, FCF is expected to grow at a constant rate of 5% forever. If IHI’s weighted average cost of capital is 19%, what is the firm's...
Diversified Industries, Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$18 million (negative), but its FCF at t = 2 will be $33 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 13%, what is the firm's value of operations, in millions? Enter your answer rounded to two decimal places. Do not enter $ or...
Zhdanov, Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$15 million (negative), but its FCF at t = 2 will be $30 million. After Year 2, FCF is expected to grow at a constant rate of 3% forever. If the weighted average cost of capital is 17%, what is the firm's value of operations, in millions? Enter your answer rounded to two decimal places. Do not enter $ or comma...
1 a) IHI, Inc. forecasts that its free cash flow in the coming year, i.e., at t=1, will be -$5 million, but then its FCF will turn positive. At t=2 IHIs FCF will be $35 million, and at t=3 IHI will be $58 million. After year 3, FCF is expected to grow at a constant rate of 5% forever. If IHI’s weighted average cost of capital is 18%, what is the firms value of operations, in millions? 1. b) A...
Diversified Industries, Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$18 million (negative), but its FCF at t = 2 will be $33 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 15%, what is the firm's value of operations, in millions? Enter your answer rounded to two decimal places. Do not enter $ or...
A) Diversified Industries, Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$18 million (negative), but its FCF at t = 2 will be $35 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 13%, what is the firm's value of operations, in millions? Enter your answer rounded to two decimal places. Do not enter $...
Edit question XYZ Corporation, Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$18 million (negative), but its FCF at t = 2 will be $49 million. After Year 2, FCF is expected to grow at a constant rate of 5% forever. If the weighted average cost of capital is 18%, what is the firm's value of operations, in millions?
Zhdanov Inc. forecasts that its free cash flow in the coming year, that is, at t = 1, will be -$10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCFis expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm's value of operations, in millions?
Suppose Yon Sun Corporation's free cash flow during the just-ended (t = 0) year was $150 million, and FCF is expected to grow at a constant rate of 4% in the future. If the weighted average cost of capital is 13%, what is the firm's value of operations, in millions? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in...
Kedia Inc. forecasts a negative free cash flow for the coming year, FCF1 = -$10 million, but it expects positive numbers thereafter, with FCF2 = $25 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14.0%, what is the firm's total corporate value, in millions?