At the end of 2006, Blue Light, Inc. has net debt of $740 million and forecasts its cash flows (in
2007 2008 2009
Cash flow from operations $1,400 $1,500 $1,750
Cash investment $1,000 $1,100 $1,300
The free cash flow will grow at a rate of 5% per year after 2009, and the required rate of return is
10%. Calculate (a) the firm's enterprise value and (b) the value of the equity at the end of 2006.
The enterprise value is the present value of free cash flows
Free cash flows = Cash flow from operations - cash investment
The free cash flow for the various years is
2007 = 1,400-1,000=400
2008 = 1,500-1,100=400
2009 = ...
The solution explains how to calculate the enterprise value and the value of equity.