Question

generated free cash flow of $88 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 10%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 12% and Bonner Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Bonner Corporation's expected terminal enterprise value in year 2

Answer 1

Therefore, Bonner Corporation's expected terminal enterprise value in year 2 is $1384.24 million

Step-by-step explanation:

Given that:

Free cash flow for current year (FCF) = $88 million

Growth rate (g) = 10% = 0.1

long term growth rate (lg) = 4% = 0.04

weighted average cost of capital (w) = 12% = 0.12

n = 2 years

The free cash flow for year 1 = FCF × (1 + g) = $88 million × (1 + 0.1) = $96.8 million

The free cash flow for year 2 = FCF ×
`(1+g)^n` = $88 million × (1 + 0.1)² = $106.48 million

Value in year 2 = (The free cash flow for year 2 × (1 + lg)) / (w - lg) = ($106.48 million × (1+0.04)) / (0.12 - 0.04) = $1384.24 million

Therefore, Bonner Corporation's expected terminal enterprise value in year 2 is $1384.24 million