To calculate the horizon value, we use the formula for present value, taking into account the growth rate and cost of capital.
We calculate the present value for each year beyond year 5 and sum them up to get the horizon value.
In this case, the horizon value is approximately $2,676.
To calculate the horizon value, we need to determine the present value of the company's free cash flows beyond year 5. Given that the cost of capital is 8%, we can use the formula for present value: PV = FCF / (1+r)^n, where FCF is the free cash flow and r is the cost of capital.
In year 6 and beyond, the growth rate is 3%. So we can calculate the PV for each year beyond year 5 using the formula.
Then, add up all the PVs to get the horizon value.
For example, in year 6, the PV would be $100 / (1+0.08)^2 = $87.96. In year 7, the PV would be $100 / (1+0.08)^3 = $81.43. Repeat this calculation for each year beyond year 5 and sum the resulting PVs.
The horizon value will be the sum of these PVs.
In this case, the horizon value (PV looking forward from year 4) is approximately $2,676.
Therefore, the correct answer is $2,676.