Question

Show your work please.

Problem 3 [1 point]: The free cash flows (in millions) shown below are forecast by Simmons Inc.

If the weighted average cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the Year 0 value of operations, in millions?

Year: 1 2 3

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Free cash flow: -$20 $42    $45

Answer 1

Perpetual growth rate = (year 3 value/year 2 value-1)

=(45/42-1) = 7.142%

	WACC=	13.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	-20		-20	1.13	-17.6991
2	-20	0.00%	42		42	1.2769	32.89216
3	42	0.00%	45	823.044	868.044	1.442897	601.59804
	Long term growth rate (given)=	7.14%			Value of Enterprise =	Sum of discounted value =	616.79
Where
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 3 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor