Question

Extensive Enterprise Inc. is expected to generate a free cash flow (FCF) of $5,005.00 million this year (FCF₁ = $5,005.00 million), and the FCF is expected to grow at a rate of 25.00% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 3.90% 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 11.70%, what is the current total firm value of Extensive Enterprise Inc.?

a) $15,106.33 million
b) $119,276.84 million
c) $107,822.24 million
d) $89,851.87 million

Answer 1

The current total firm value of Extensive Enterprise Inc. can be calculated using the discounted cash flow (DCF) valuation method.

To calculate the current total firm value of Extensive Enterprise Inc., we need to use the discounted cash flow (DCF) valuation method. Here are the steps:

1. Calculate the present value (PV) of the expected free cash flows (FCFs). Use the formula PV = FCF / (1 + WACC)^t, where FCF is the cash flow in a given year, WACC is the weighted average cost of capital, and t is the number of years in the future.
2. Calculate the PV of the growth period FCFs using the formula PV = FCF / (WACC - growth rate). The growth rate for the first two years is 25.00%, and it's 3.90% for the following years.
3. Add up the PVs of all the FCFs to get the current firm value.

Using these steps, the current total firm value of Extensive Enterprise Inc. is $119,276.84 million (option b).