Question

Robinson Incorporated forecasts that it will have free cash flows (in millions) as follows: Year 1 = $20.00, Year 2 = $48.00, and Year 3 = $50.50. If the WACC is 14% 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 firm's total corporate value, in millions? A) $535.20 B) $553.65 C) $572.11 D) $549.04 E) $461.38

Answer 1

Hi

Free Cash Flow Y1 = -$20

Free Cash Flow Y2 = $48

Free Cash Flow Y3 = $50.50

Y2 to Y3 growth rate g = 50.50/48 -1

= 5.21%

Total corporate Value will be equal to present value of future free cash flow.

WACC =14%

So corporate value = -20/(1+14%) + 48/(1+14%)^2 + 50.5/(1+14%)^3 + 50.5*(1+5.21%)/(14%-5.21%)*(1+14%)^3

   = $461.38 million

Hence option E is correct here.

Thanks