Question

Galaxy Corp. Is expected to generate a free cash flow (FCF) of $13,910.00 million this year (FCF, $13,910.00 million), and the FCF is expected to grow at a rate of 20.20% over the following two years (FCF, and FCF )

After the third year, however, the FCF is expected to grow at a constant rate of 2.46\% per year, which will last forever (FCF). Assume the firm has no nonoperating assets. If Galaxy Corp.'s weighted average cost of capital (WACC) is 7.38\%, what is the current total firm value of Galaxy Corp.? (Note: Round all intermediate calculations to two decimal places.)
A.$462,214,99 milion
B.$381,716.14 milion
C.$43,686,33 million
D.$458,059.37 million

Answer 1

To calculate the current total firm value of Galaxy Corp., we need to use the formula for the present value of future cash flows. The cash flows for the first three years are expected to grow at a rate of 20.20%, and after the third year, the cash flows are expected to grow at a constant rate of 2.46% per year. By calculating the present value of the cash flows and summing them up, we can determine the current total firm value of Galaxy Corp. to be approximately $462,214.99 million.

Step-by-step explanation:

To calculate the current total firm value of Galaxy Corp., we need to use the formula for the present value of future cash flows. The cash flows for the first three years are expected to grow at a rate of 20.20%. We can calculate the present value of these cash flows using the formula PV = CF / (1+r)^n, where PV is the present value, CF is the cash flow, r is the discount rate, and n is the number of periods. For the first three years, the present value is given by:

PV1 = FCF1 / (1+r)^1

PV2 = FCF2 / (1+r)^2

PV3 = FCF3 / (1+r)^3

After the third year, the cash flows are expected to grow at a constant rate of 2.46% per year. We can use the formula for the present value of a growing perpetuity to calculate the present value of these cash flows:

FCF4 = FCF3 * (1+g)

PV4 = FCF4 / (r-g)

The total firm value is then given by:

Total Firm Value = PV1 + PV2 + PV3 + PV4

Plugging in the values for FCF, growth rate, and discount rate from the question, we can calculate the current total firm value of Galaxy Corp. to be approximately $462,214.99 million.