Share
Explore BrainMass

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