Question

Year 1 2 3 4 Free Cash Flow ​$12 million ​$18 million ​$22 million ​$26 million Conundrum Mining is expected to generate the above free cash flows over the next four​ years, after which they are expected to grow at a rate of 3​% per year. If the weighted average cost of capital is 13​% and Conundrum has cash of​ $80 million, debt of​ $60 million, and 30 million shares​ outstanding, what is​ Conundrums expected terminal enterprise​ value

Answer 1

$463.67 million

Step-by-step explanation:

The computation of the expected terminal enterprise value is shown below:

Terminal Enterprise value is

= Free cash flow × (1 + growth rate) ÷ (Weighted average cost of capital - growth rate)

= $26 million × (1.07) ÷ (0.13 - 0.07 )

= $27.82 million ÷ 0.06

= $463.67 million

We simply applied the above formula to determine the expected terminal value