Question

Globo-Chem Co. is expected to generate a free cash flow (FCF) of $1,490.00 million this year (FCF₁ = $1,490.00 million), and the FCF is expected to grow at a rate of 22.60% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 3.18% per year, which will last forever (FCF₄). Assume the firm has no nonoperating assets. If Globo-Chem Co.’s weighted average cost of capital (WACC) is 9.54%, what is the current total firm value of Globo-Chem Co.? (Note: Round all intermediate calculations to two decimal places.)

a. $32,229.68 million
b. $40,919.89 million
c. $38,675.62 million
d. $4,586.56 million

Answer 1

To calculate the current total firm value of Globo-Chem Co., we need to use the formula for the present value of free cash flows. Based on the given information, the current total firm value of Globo-Chem Co. is $32,229.68 million.

Step-by-step explanation:

To calculate the current total firm value of Globo-Chem Co., we need to use the formula for the present value of free cash flows. The present value (PV) of future cash flows can be calculated by discounting each cash flow by its corresponding discount factor. In this case, we have two stages: the first three years with a high growth rate and the perpetuity stage with a constant growth rate. Using the formula PV = FCF / (1 + WACC)^n, we can calculate the present value of the cash flows and sum them up to find the current total firm value. Based on the given information, the current total firm value of Globo-Chem Co. is $32,229.68 million.