What is the current value of operations based on an overall cost of capital of 14%?
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A company forecasts free cash flows in one year to be (negative) -$10 Million and free cash flow in two years to be $20 Million. After the second year, free cash flow will grow at a constant rate of 4% per year for the foreseeable future. If the overall cost of capital is 14%, what is the current value of the operations?
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The solution explains how to determine the current value of operations with step-by-step calculations and the answer.
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The current value of operations is the present value of the free cash flows (FCF). From second year onwards the cash flows will grow at a constant rate. We can find the PV of all the cash flows from year 3 ...
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