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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?
| Answer | ||||
|
firm's value of operations, in millions |
$ 252.46 | |||
| Statement showing Current Price | in millions | |||
| Particulars | Time | PVf18% | Amount | PV |
| Cash flows | 1 | 0.8475 | -18 | $ -15.26 |
| Cash flows | 2 | 0.7182 | 49 | $ 35.19 |
| Cash flows | 3 | 0.7182 | 323.77 | $ 232.53 |
| Present Value | $ 252.46 | |||
| PV = 40*1.05/(18% - 5%) | ||||
| PV = 42/(18% - 5%) | ||||
| PV = $ 323.77 | ||||
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