Question

You are in the middle of valuing a stock using the DCF method. According to your projections, the company is expected to generate free cash flows of $71 million in 4 years, after which FCFF is expected to grow at a stable rate in perpetuity. Instead of using the perpetuity growth method, you decide to estimate the company's terminal value using the exit multiple approach. Your analysis of comparable companies reveal an average EV/FCFF ratio of 10.3. What is your estimate of the company's Terminal Value? Answer in millions, rounded to one decimal place.

Answer 1

$731.3 million

Step-by-step explanation:

The computation of the terminal value is shown below:

= EV/FCFF ratio × free cash flows

= 10.3 × $71 million

= $731.3 million

For computing the terminal value, we multiply the EV/FCFF ratio with the generated free cash flows so that the true value can come. The time period which is given in the question is to be ignored as it is not relevant for the computation part