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 8%. The company's weighted average cost of capital is 18%. 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. $ 1000000 Calculate the value of Kendra's operations. Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Answer:

THe terminal or horizon, value of operation will be of 1,080,000 dollars.

Explanation:

We use it like gordon model:

$\frac{FCF_1}{return-growth} = Intrinsic \: Value$

as we calculate for Year 2 we use year 3 FCF:

FCF year 2: 100,000

year 3: year 2 x (1+g)

100,000 x 1.08 = 108,000

then g = 8%

and return = WACC = 18%

$\frac{108,000}{0.18-0.08} = Intrinsic \: Value$

Intrinsic value = 1,080,000