Kendra Enterprises has never paid a dividend. Free cash flow is projected to be
ID: 2808092 • 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 17%. 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. Do not round intermediate calculations. Round your answer to the nearest cent. $
Explanation / Answer
a Horizon value of operations=(FCF for year 2*Growth rate)/(WACC-Growth rate)
=(100,000*1.05)/(0.17-0.05)
which is equal to
=$875,000
b.value of Kendra's operations=Future FCF*Present value of discounting factor(17%,time period)
=80000/1.17+100,000/1.17^2+875000/1.17^2
which is equal to
=$780626.78(Approx).
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