Question

Petty Corporation forecasts a negative free cash flow for the coming year, with FCF_1 = $10 million, but it expects positive numbers thereafter, with FCF_2 = $29 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%, what is the firm’s total corporate value, in millions?

Answer 1

Value of firm is equal to the present value of all future free cash flows

= -10 million/(1.14) + 29 million/(1.14)^2 + 29 million(1.04)/(1.14)^2 (14%-4%)

= $245.61 million