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Terminal value and discount back to the present

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On January 1, 2004, shares of Company X trade at $6.50 per share, with 400 million shares outstanding. The company has net debt of $300 million. After building an earnings model for Company X, you have projected free cash flow for each year through 2010 as follows:

Year 2004 2005 2006 2007 2008 2009 2010
Free Cash Flow 110 120 150 170 200 250 280

You estimate that the weighted average cost of capital (WACC) for Company X is 10% and assume that free cash flows grow in perpetuity at 3.0% annually beyond 2010, the final projected year.

Calculate the terminal value and discount back to the present:

1. $1,922.0 million
2. $1,979.7 million
3. $2,114.2 million
4. $4,120.0 million

Please select only 1 option out of the 4 options listed above.

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The terminal value and discount back to the present are determined. The expert estimates the weighted average cost of capital for a Company X.

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TERMINAL VALUE AND DISCOUNT BACK TO THE PRESENT
On January 1, 2004, shares of Company X trade at $6.50 per share, with 400 million shares outstanding. The company has net debt of $300 million. After building an ...

Solution provided by:
Chidi Ngene, M. Sc.
Education
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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