Question

Gupta Corporation is undergoing a restructuring, and its free cash flows are expected to vary considerably during the next few years. However, the FCF is expected to be $65.00 million in Year 5, and the FCF growth rate is expected to be a constant 6.5% beyond that point. The weighted average cost of capital is 12.0%. What is the horizon (or continuing) value (in millions) at t = 5?

a. $1,025
b. $1,259
c. $1,136
d. $1,196
e. $1,079

Answer 1

d. approximately $1,196

Step-by-step explanation:

Value of the firm= FCF÷(k−g)

where:

FCF =operating free cash flow

k=discount rate, in this case WACC

g=expected growth rate in FCF

Therefore the horizon value of Gupta Corporation will be

65/(0.12-0.065) = $1,182

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