Question

Suppose Leonard, Nixon, & Shull Corporation's projected free cash flow for next year is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company's weighted average cost of capital is 11%, what is the value of its operations?

Answer 1

The value of its operations is 2,120,000.

Step-by-step explanation:

The value of the company is equal to the present value of the future cash flows. It could be calculated in many ways, but one of the simplest is

`(FCF.year1 * (1+G))/(WACC-G)`

Where G is the expected grow rate, and WACC is the cost of capital.

In this case, the value will be equal to

`(100,000 * (1.06))/(0.11-0.06) = 2,120,000.00`