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    Value of Company and Discounted Cash Flows

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    What is the value of a company with the following cash flows?

    Year1 - $3 million
    Year 2 - $6 million
    Year 3 - $2 million
    Years 4 - 10 - $2.5 million year 4, growing at 30% annually through year 10
    Year 11 - 8% annual growth from year 10 cash flow indefinitely
    WACC of 11.5%

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    © BrainMass Inc. brainmass.com December 24, 2021, 11:39 pm ad1c9bdddf
    https://brainmass.com/business/discounted-cash-flows-model/value-company-discounted-cash-flows-590101

    SOLUTION This solution is FREE courtesy of BrainMass!

    Please refer to the attached file for the complete solution

    Solution:
    Value of the company = Sum of PV of free cash flows in the non-constant growth periods + PV of value of company at the end of Non-constant growth period

    Below given are the cash flows in the non-constant growth periods (till year 10) and their sum of PV.
    Year Cash flows PV factor PV of
    at 11.5% cash flows
    1 $3,000,000 0.8968609865 $2,690,582.96
    2 $6,000,000 0.8043596292 $4,826,157.78
    3 $2,000,000 0.7213987706 $1,442,797.54
    4 $2,500,000 0.6469944131 $1,617,486.03
    5 $3,250,000 (Year 4 cash flow + 30%) 0.5802640476 $1,885,858.15
    6 $4,225,000 (Year 5 cash flow + 30%) 0.5204161862 $2,198,758.39
    7 $5,492,500 0.4667409742 $2,563,574.80
    8 $7,140,250 0.4186017705 $2,988,921.29
    9 $9,282,325 0.3754275969 $3,484,840.97
    10 $12,067,023 0.3367063649 $4,063,043.28
    Sum of PV of cash flows in the initial growth period = $27,762,021.19

    The non-constant growth period ends at Year 10. Therefore, we have to find the value of the company at the end of Year 10.

    Value of Company at the end of year 10 = Free cash flows of Year 11 / (WACC - growth-rate)

    FCF of Year 11 = Year 10 FCF * (1+g) = $12,067,023 * (1+.08) = $13,032,384.30

    Value of Company at the end of Year 10 = 13,032,384.30/(11.5%-8%) $372,353,837.14

    PV of Value of company at the end of year 10 = 372,353,837.14/(1+.115)^10 $125,373,906.97

    Last step:
    Sum of PV of FCFs in the non-constant growth periods $27,762,021.19
    PV of Value of company at the end of Year 10 $125,373,906.97
    Value of the Company at present = $153,135,928.17

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com December 24, 2021, 11:39 pm ad1c9bdddf>
    https://brainmass.com/business/discounted-cash-flows-model/value-company-discounted-cash-flows-590101

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