Kendra Enterprises has never paid a dividend. Free cash flow is projected to be
ID: 2633269 • Letter: K
Question
Kendra Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 5%. The company's weighted average cost of capital is 18%.
What is the terminal, or horizon, value of operations? (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2.)
Round your answer to the nearest cent. $
second part
Calculate the value of Kendra's operations. Round your answer to the nearest cent. Round intermediate calculations to two decimal places.
Explanation / Answer
value of operation when FCF is expected to grow at 7% rate
Terminal value = Vn = FCF2(1 g)/WACC - g
V2=$100,000(1 .05)/.18-.05
V2 = $807692
Value of operation = Vo = PV of expected future free cash flow
Vo = FCF1/(1 WACC)^1 + FCF2/(1 WACC)^2 + terminal value/(1 WACC)^2
Vo = $80,000/(1 .18)^1+ $100,000/(1 .18)^2 + $807692/(1 .18)^2
V0 = $67796.61 + $71818.44 + $580071.82 = $ 719687 ANSWER
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