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# Value of firm at the end of four years

A company is not expected to generate a FCF over the next four years. Five years from now, the company anticipates that it will generate a FCF of \$1.00 (i.e., FCF5=\$1.00). The market expects that the FCF will grow at a constant rate of 5 percent per year forever. The risk-free rate is 5 percent, the company's beta is 1.2, and the market risk premium is 5 percent. The required rate of return on the company's stock is expected to remain constant. What is the current value of the company?
A) \$7.36
B) \$8.62
C) \$9.89
D) \$10.98
e) \$11.53

I cannot seem to reason this out. None of the answers I get are choices. I am supposed to explain this to my group but I do not get it. Could you do the calculation out?

#### Solution Preview

A company is not expected to generate a FCF over the next four years. Five years from now, the company anticipates that it will generate a FCF of \$1.00 (i.e., FCF5=\$1.00). The market expects that the FCF will grow at a constant rate of 5 percent ...

#### Solution Summary

Response explains the steps to calculate the value of firm at the end of four years.

\$2.19