Question

Gonzales Corporation generated free cash flow of $ 85 million this year. For the next two​ years, the​ company's free cash flow is expected to grow at a rate of 8​%. 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 10​% and Gonzales Corporation has cash of​ $100 million, debt of​ $300 million, and 100 million shares​ outstanding, what is Gonzales​ Corporation's expected free cash flow in year​ 2?

Answer 1

Free cash flow in year 2 is $ 99.14 million

Step-by-step explanation:

Year one free cash flow=free cash flow in the current year*(1+growth rate)

free cash flow in the current year is $85 million

free cash flow growth rate is 8%

year one free cash flow=$85 million*(1+8%)

=$85 million *1.08=91.8 million

year two free cash flow=year one free cash flow*(1+growth rate)

year one free cash flow $91.8 million

free cash flow growth rate remains at 8%

year two free cash flow=$91.8 million *(1+8%)=$91.8 million *1.08=$99.14 million

The free cash flow in year for Gonzales corporation is computed as $ 99.14 million

Alternatively

free cash flow in year two=$85 million *(1+8%)^2 =$ 99.14 million