Questions
fin_221_120251_242735 Submit: Test 3 (Chapters 7, 8, and 9)
Single choice
Kale Inc. forecasts the free cash flows (in millions) shown below. Assume the firm has zero non-operating assets. If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2, then what is the firm’s total corporate value (in millions)? Do not round intermediate calculations. Year 1 2 Free Cash flow -$50 $100
Options
A.$1,675
B.$1,515
C.$1,558
D.$1,617
E.$1,456
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Step-by-Step Analysis
We start by identifying the cash flows and the growth assumption:
- Year 1 FCF = -50
- Year 2 FCF = 100
- After Year 2, FCF grows at g = 5% per year
- WACC = 11% and there are zero non-operating assets, so the firm’s value is the PV of all future FCFs.
First, compute the value at the end of Year 2 (the point just after Year 2 cash flow) of the perpetually growing FCF stream starting in Year 3. ......Login to view full explanationLog in for full answers
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