Current Value and Horizon Value
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Suppose a company's most recent free cash flow (i.e., yesterday's free cash flow) was $100 million and is expected to grow at a constant rate of 5 percent. If the company's weighted average cost of capital is 15 percent, what is the current value of operations?
a. $ 913 million
b. $1,000 million
c. $1,050 million
d. $1,500 million
e. $2,000 million
14. A company forecasts free cash flow of $50 million in five years. It expects the free cash flow to grow at a constant rate of 6 percent thereafter. If the weighted average cost of capital is 12 percent, what is the horizon value, to the nearest million?
a. $53 million
b. $501 million
c. $600 million
d. $833 million
e. $883 million
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Solution Summary
The solution explains how to calculate the current value of operations and the horizon value given the free cash flows
Solution Preview
1. The value today is found by the following formula
Cash Flow * (1+growth Rate)/ (Discount ...
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