Question

he free cash flows (in millions) shown below are forecast by Serta Inc. If the weighted average cost of capital is 12% 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
Free cash flow:	−$10	$43	$47

	a.	$1,524.14
	b.	$1,414.25
	c.	$1,277.98
	d.	$1,182.75
	e.	$1,327.54

Answer 1

Growth rate = [ CF3 / CF2 ] - 1

= [ 47 / 43 ] - 1

= 1.0930 - 1

= 0.0930 i.9.30%

PV of future CFs Year 2:

= CF3 / [ Req ret - Growth Rate ]

= $ 47 M / [ 12% - 9.30% ]

= $ 47 M / 2.70%

= $ 1740.74

Value of Operations: PV of CFs from it.

Year	CF	PVF @12%	Disc CF
1	$     -10.00	0.89285714	$         -8.93
2	$       43.00	0.79719388	$        34.28
2	$ 1,740.74	0.79719388	$   1,387.71
Value of Operations			$   1,413.06

Option B is correct.

Pls comment, if any further asisstance is required.