Kendra Enterprises has never paid a dividend. Free cash flow is projected to be
ID: 2738673 • 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 6%. The company's weighted average cost of capital is 13%.
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.
$
Calculate the value of Kendra's operations. Round your answer to the nearest cent. Round intermediate calculations to two decimal places.
$
Explanation / Answer
Discounted cash flows:
Year
Cash flows
Discounting factor @13%
Discounted
cash flow
1
$ 80,000
0.884956
$ 70,796.48
2
$ 100,000
0.783147
$ 78,314.70
$ 149,111.18
Determine the terminal value of operations:
Terminal value = $149,111.18 / (0.13-.06)
= $2,130,159.71
Determine the value of operations:
Value of operations = $149,111.18 / (0.13)
= $1,147,009
Year
Cash flows
Discounting factor @13%
Discounted
cash flow
1
$ 80,000
0.884956
$ 70,796.48
2
$ 100,000
0.783147
$ 78,314.70
$ 149,111.18
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