Question

7. The following are the projected cash flows to the firm over the next five years: Year Cash Flows to the Firm (Million) 1 $120 2 $145 3 $176 4 $199 5 $245 The firm has a cost of capital (WACC) of 12% and the cash flows are expected to grow at the rate of 4% in perpetuity? a) What is the value of the firm today? b) At what growth rate will the firm have a value of $3000 Million?

Answer 1

a) first we have to calculate the terminal value at year 5:

terminal value = ($245 x 1.04) / (12% - 4%) = $254.8 / 8% = $3,185

year cash flow

1 $120

2 $145

3 $176

4 $199

5 $245 + $3,185 = $3,430

Using a financial calculator, the enterprise value = $2,420.75

b) again, using a financial calculator, the discount rate at which the enterprise value is $3,000 would be 6.8423%