Question 18.ss.4: You are valuing a company using the WACC approach and have e...

Fundamentals of Corporate Finance

You are valuing a company using the WACC approach and have estimated that the free cash flows from the firm (FCFF) in the next five years will be $36.7, $42.6, $45.1, $46.3, and $46.6 million, respectively. Beginning in year 6, you expect the cash flows to decrease at a rate of 3 percent per year for the indefinite future. You estimate that the appropriate WACC to use in discounting these cash flows is 10 percent. What is the value of this company?

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The present value of the cash flows expected over the next five years is:

\begin{matrix} PV(FCFF_5) &=& \frac{\$36.7 \ million}{1+0.1}+\frac{\$42.6 \ million}{(1+0.1)^2}+\frac{\$45.1 \ million}{(1+0.1)^3}+\frac{\$46.3 \ million}{(1+0.1)^4}+\frac{\$46.6 \ million}{(1+0.1)^5} \\ \\ &=&\$163.01 \ million \end{matrix}

The terminal value is:

TV_5=\frac{FCFF_5\times (1+g)}{WACC-g}=\frac{\$46.6 \ million \times(1-0.03)}{0.1+0.03}=\$347.71 \ million

and the present value of the terminal value is:

PV(TV_5)=\frac{TV_5}{(1+WACC)^5}=\frac{\$347.71 \ million}{(1+0.1)^5}=\$215.90 \ million

Therefore, if there are no nonoperating assets, the value of the firm is:

V_F=\$163.01 \ million+\$215.90 \ million=\$378.91 \ million

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