Question

09-10 Dozier Corporation is a fast-growing supplier of office products. Analysts project the following FCF during the next 3 years, after which FCF is expected grow at a constant 8 percent. Dozier's WACC = 13%. Time YEAR 1 3 40 + 4 → 8% growth FCF (million) 20 30 9. What is Dozier's terminal, or horizon value (value of operation at time 3 for constant part)? 10. What is the current value of operations (present value of all cash flow)?

Answer 1

9]

terminal value = Year 3 FCF * (1 + constant growth rate) / (WACC - constant growth rate)

terminal value = 40 * (1 + 8%) / (13% - 8%)

terminal value = 864

10]

present value of each cash flow = cash flow / (1 + WACC)n

where n = number of years after which the cash flow occurs

value of operations = present value of next 3 years FCF + present value of terminal value

value of operations = (20 / (1 + 13%)1) + (30 / (1 + 13%)2) + (40 / (1 + 13%)3) + (864 / (1 + 13%)3)

value of operations = 667.71