# years FCF WACC G Period 1 2 45 million 14.5% 12% Period 2 3 56.5 million 13.5%
ID: 2816270 • Letter: #
Question
# years
FCF
WACC
G
Period 1
2
45 million
14.5%
12%
Period 2
3
56.5 million
13.5%
8%
Period 3
perpetuity
65.9 million
12.5%
6%
ABC Corp has been determined to be coming out of a growth phase and will be entering a mature profitable period for the foreseeable future. You have analyzed their financial statements and have determined they will have 3 distinct periods coming up. What is the firm's value, given the following?
# years
FCF
WACC
G
Period 1
2
45 million
14.5%
12%
Period 2
3
56.5 million
13.5%
8%
Period 3
perpetuity
65.9 million
12.5%
6%
Explanation / Answer
Firms value can be calculated as the sum of present value of its free casf flow (FCF).
Present value = Free Cash flow/(1+r)n
where r is rate of WACC and n is period of free cash flow
In this case, in period 3 the firm is growing at 6% for perpetuity. So we will use the gordan growth formal to calculate its terminal value when the company will reach period 3
Terminal value = FCF(1+g)/(WACC-g)
This terminal value is the value at the end of period 2 so we will again discount it to the present value by discounting it to the WACC of period 2 and period 1
FCFn denotes the Free cah flow at time n
FCF1 = 45 million
FCF2 = 45*(1+ growth rate)
For period 1, growth rate is 12%
Therefore, FCF2 = 45*(1+ 12%) = 50.4 million
FCF3 = 56.5 million
For period 2, growth rate is 8%
Therefore, FCF4 = 56.5*(1+ 8%) = 61 million
FCF5 = 56.5*(1+8%)2 = 65.9 million
For perpetuity, growth rate is 6%
Therefore, FCF6 = 65.9*(1+ 6%) = 69.9 million
WACC for period 3 = 12.5%
Terminal value = 69.9/(0.125-0.06) = 1074.70 million
WACC for period 2 is 13.5% so all FCF of period 2 will be dicounted by 13.5% and then 14.5% i.e. WACC of period 1
WACC for period 1 is 14.5%
Value of firm = FCF1/(1+WACC1)1 + FCF2/(1+WACC1)2 + FCF3/(1+WACC1)2*(1+WACC2)3 + FCF4/(1+WACC1)2*(1+WACC2)4 + FCF5/(1+WACC1)2*(1+WACC2)5 + TV/(1+WACC1)2*(1+WACC2)5
where WACCn is WACC for period n
WACC1 = 14.5%
WACC2 = 13.5%
By using these values and value of FCF and TV as calculated before
Value of a firm = 45/(1+0.145)1 + 50.4/((1+0.145)2 + 56.5/(1+0.145)2*(1+0.135)3 + 61.0/(1+0.145)2*(1+0.135)4 + 65.9/(1+0.145)2*(1+0.135)5 + 1074.70/(1+0.145)2*(1+0.135)5
By solving this, we will get value of the firm
Value of a firm = 597.16 million
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