Question

Company has projected the following cash flows: Year 1: 85,000; Year 2: 105,000; Year 3: 109,000; Year 4: 115,000. The valuator has determined an appropriate discount rate is 26% and the long-term growth rate is 2%. Using the Gordon Growth Model, what is the present value of the company's terminal value

Answer 1

193,912

Step-by-step explanation:

First and foremost, the terminal value also known as horizon value is the cash flows for the company beyond year 4 to infinity, in other words, the cash flows attributed to all periods after the first 4 years whose cash flows were highlighted.

The formula for terminal value is provided below:

TV=Year 4 cash flow*(1+ long-term growth rate)/(discount rate- long-term growth rate)

Year 4 cash flow=115,000

long-term growth=2%

discount rate=26%

terminal value=115,000*(1+2%)/(26%-2%)

terminal value=488,750

The terminal value is stated in year 4 terms, hence, needs to be discounted 4 years backward in order to determine its present value:

PV of terminal value=488,750/(1+26%)^4

PV of terminal value= 193,912