Question #42

Reading: Reading 21 Free Cash Flow Valuation

PDF File: Reading 21 Free Cash Flow Valuation.pdf

Page: 19

Status: Correct

Correct Answer: A

Part of Context Group: Q42-44 First in Group
Shared Context
- Given the assumptions contained in Scenario 1, the value of the firm is most accurately estimated as: A) $343 million. B) $333 million. C) $250 million.
Question
In Scenario 2, the value of the firm is closest to:
Answer Choices:
A. $315 million
B. $346 million
C. $321 million
Explanation
The value of the firm is the present value of Year 1-3 plus the terminal value. The terminal value is: FCFF for year 4/(WACC – growth rate) = $40.62/(0.12 – 0.02) = $406.22 million in terms of year 3 dollars. The calculator inputs to solve NPV for the value of the firm is: CF0 = $0, CF1 = $18.90, CF2 = $23.64, CF3 = $29.09 + $406.22 = $435.31, I =12. NPV = $345.57 million.
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