Horizon Value of Free Cash Flows Current and projected free cash flows for Radel

Question

Horizon Value of Free Cash Flows
Current and projected free cash flows for Radell Global Operations are shown below.

                      Actual 2016   2017 Projected   2018         2019
Free cash flow   $617.16   $677.84           $717.89      $768.14
(millions of dollars)           

Growth is expected to be constant after 2015, and the weighted average cost of capital is 11.85%. What is the horizon (continuing) value at 2016 if growth from 2015 remains constant? Round your answer to the nearest dollar

Explanation / Answer

Growth rate = ($677.84-$617.16)/$617.16 = 9.83%

Horizon value = Free cash flows1÷( Capitalization Rate- growth rate )

= $677,840,000/(11.85%-9.83%)

= $33,556,435,644

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