Question

Extensive Enterprise Inc. is expected to generate a free cash flow (FCF) of $7,185.00 million this year (FCF₁ = $7,185.00 million), and the FCF is expected to grow at a rate of 21.40% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 2.82% per year, which will last forever (FCF₄). Assume the firm has no nonoperating assets. If Extensive Enterprise Inc.’s weighted average cost of capital (WACC) is 8.46%, what is the current total firm value of Extensive Enterprise Inc.? (Note: Round all intermediate calculations to two decimal places.)

a) $208,373.08 million
b) $22,339.04 million
c) $215,385.85 million
d) $173,644.23 million

Answer 1

To calculate the current total firm value of Extensive Enterprise Inc., we use the discounted cash flow (DCF) valuation method, which involves calculating the present value (PV) of future cash flows. By calculating the PV of the free cash flows (FCF) for the next three years and the perpetuity growth cash flow, we can determine the current total firm value to be approximately $215,385.85 million.

Step-by-step explanation:

To calculate the current total firm value of Extensive Enterprise Inc., we need to use the discounted cash flow (DCF) valuation method. First, we calculate the present value (PV) of the free cash flows (FCF) for the next three years using the formula:

PV = FCF₁ / (1 + WACC) + FCF₂ / (1 + WACC)² + FCF₃ / (1 + WACC)³

Next, we calculate the PV of the perpetuity growth cash flow (FCF₄) using the formula:

PV = FCF₄ / (WACC - growth rate)

Finally, we sum up the PVs of FCF₁-₃ and the PV of FCF₄ to get the current total firm value. Plugging in the values, the current total firm value is approximately $215,385.85 million.