Question

suppose an analyst estimates that free cash flow will be $2.43 million in year 5. what is the present value of this free cash flow if the company cost of capital is 12%, the wacc is 10%, and the equity cost of capital is 15%?

Answer 1

The present value of a $2.43 million free cash flow to be received in 5 years, discounted at the WACC of 10%, is $1.51 million.

Step-by-step explanation:

The student has asked how to calculate the present value of a future free cash flow of $2.43 million expected in year 5, given a company's cost of capital. While multiple rates are provided, typically the Weighted Average Cost of Capital (WACC) is used for such a calculation because it reflects the average rate that a company is expected to pay for its financing from both debt and equity capital sources.

Using the present value formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value (in this case $2.43 million), r is the discount rate (WACC of 10%), and n is the number of periods (in this case 5 years), we can calculate the present value:

PV = $2.43 million / (1 + 0.10)^5

PV = $2.43 million / (1.61051)

PV = $1.51 million

This represents the value today of the $2.43 million cash flow expected to be received in 5 years.