Terminal value refers to the valuation attached to the end of the planning perio

Question

Terminal value refers to the valuation attached to the end of the planning period; it captures the value of all subsequent cash flows. Estimate the value today for each of the following sets of future cash flow forecasts.

Shameless Commerce Inc. has no outstanding debt and is being evaluated as a possible acquisition. Shameless’s FCFs for the next five years are projected to be $1 million per year, and, beginning in year 6, the cash flows are expected to begin growing at the anticipated rate of inflation, which is currently 3% per annum. If the cost of capital for Shameless is 10%, what is your estimate of the present value of the FCFs?

Please show formulas so I can re-create in Excel. Thanks!!!

b. Shameless Commerce, Inc. Given Unlevered Cost of Capital 10.00% growth rate in terminal cash flows 3.00% Year 1 2 3 4 5 6+ FCF $ 1,000,000.00 $ 1,000,000.00 $ 1,000,000.00 $     1,000,000.00 $ 1,000,000.00 $ 1,030,000.00 Solution Valuing the unlevered cash flows Planning period ???????? Terminal value ???????? Enterprise Value ????????

Explanation / Answer

Terminal Value of Project at the end of year 5 = 1030000 / 0.10 - 0.03

= 1030000 / 0.07

= $ 14714285.71 (approx)

Present Value of the Free Cash Flows (FCFs) = 1000000 * Cumulative Present Value Factors for 5 years @ 10 % + 14714285.71 * Present Value Factor for Year 5 @ 10 %.

= 1000000 * 3.791 + 14714285.71 * 0.621

= 3791000 + 9137571.43

= $ 12928571.43 (approx)

Conclusion:- Present Value of the Free Cash Flows (FCFs) = $ 12928571.43 (approx)

NOTE:- Terminal Value at the end of Year 5 is calculated by the following formula:-

Terminal Value at end of Year 5 = Free Cash Flow for Year 6 / (Cost of Capital - Growth rate)

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