Question

Ankh-Sto Associates Co. is expected to generate a free cash flow (FCF) of $14,835.00 million this year ( FCF1 = $14,835.00 million), and the FCF is expected to grow at a rate of 25.00% over the following two years ( FCF 2 and FCF3 ). After the third year, however, the FCF is expected to grow at a constant rate of 3.90% per year, which will last forever ( FCF 4 ). Of Ankh-Sto Associates Co.’s weighted average cost of capital (WACC) is 11.70%, what is the current total firm value of Ankh-Sto Associates Co.

Answer 1

Value of Ankh-So = $266,324.32 millions

Step-by-step explanation:

The value of a firm can be derived as the present value of this free cash flow discounted at the weighted average cost of capital

Year workings Present Value (Millions)

1 14,835.00× 1.117^(-1) = 13,281.11

2 14,835.00× 1.25× 1.117^(-2)= 14,862.48

3 14,835.00× 1.25^2× 1.117^(-3)= 16,632.14

Year 4 and beyond

This will be done in two steps

PV in year 3

= 14,835.00× 1.25^2 × 1.039/(0.117-0.039)

= 308,765.32

PV in year 0

308,765.32 × 1.117^(-3) = 221,548.596

Value of Ankh-So

=13,281.11 + 14,862.48 + 16,632.14 + 221,548.596

= $266,324.32 millions