Firm C is considering the acquisition of Firm T. Firm C has estimated the cash f

Question

Firm C is considering the acquisition of Firm T. Firm C has estimated the cash flows, cost of
capital, and growth rate for firm T shown below. Using these estimates, estimate the current
value of firm T using the terminal value technique/horizon value.

WACC = 12%, g = 3% (assumed constant following year 4).

Check Answer: Estimated Firm Value Today = $31,275

Please show all work to get to firm value of $31,275!

**After calculating the terminal value at year 4, just combine that number with the year 4 CF
and that will be CF4 for the calculator input. You can then use the cash flow worksheet on a
financial calculator to solve, just assume that CF0 = $0.

Explanation / Answer

Terminal value = Y4CF*(1+g)/(WACC-g) = 3210*(1+3%)/(12%-3%) = $36,737

So Current value = CF1/(1+WACC)^1 + CF2/(1+WACC)^2 + CF3/(1+WACC)^3 + CF4/(1+WACC)^4 + TV/(1+WACC)^4

= 2130/(1+12%)^1 + 2420/(1+12%)^2 + 2890/(1+12%)^3 + 3210/(1+12%)^4 + 36737/(1+12%)^4

= $31,275

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