Question

4.

Value of Operations

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 10%. The company's weighted average cost of capital is 15%.

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. Ans:$_____________

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

Ans: $____________

Answer 1

	WACC=	15.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	80000		80000	1.15	69565.2174
2	80000	0.00%	100000	2200000	2300000	1.3225	1739130.435
	Long term growth rate (given)=	10.00%			Value of operations=	Sum of discounted value =	1808695.65
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