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Questions
MSB-250-300-002 Topic 13 Quiz
Single choice
Assume you’ve forecasted and calculated the following free cash flows to the firm. Year FCFF 1 $264.08 2 $271.54 3 $274.85 You have also made the assumption that after year 3, the cash flows will grow at a constant rate of 4% per year indefinitely. The company has a WACC of 9.5%. Given this information, what is the value of this firm?
Options
A.$1,587.68
B.$1,684.37
C.$1,744.09
D.$4,635.42
E.$2,008.74
View Explanation
Standard Answer
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Approach Analysis
We are given FCFFs for years 1–3 and a perpetual growth rate after year 3, along with the firm's WACC. The value of the firm (enterprise value) is the present value of FCFFs in years 1–3 plus the present value of the terminal value at the end of year 3.
First, compute the terminal value at the end of year 3. Since FCFF grows forever at g = 4%, FCFF4 = FCFF3 × (1 + g) = 274.85 × 1.04 = 285.844. The terminal value at t = 3 is TV3 ......Login to view full explanationLog in for full answers
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