Question

Leo’s Cars has a beta of 1.1 and its RWACC is 13.6 percent. The market risk premium is 7.2 percent, and the risk-free rate is 2.3 percent. The firm's cash flow at Time 4 is $28,800 with a growth rate of 2.1 percent. What is the value of the firm at Time 4?

Answer 1

Answer:

$153,534.87

Explanation:

Terminal value = Cash flows*(1+g)/(WACC-g)

Terminal value = $28,800*(1+2.1%)/(13.6%-2.1%)

Terminal value = $28,800*1.021/0.115

Terminal value = $255,693.91

Present value of TV = Value of firm

Present value of TV = (TV / (1+WACC)^n)

Present value of TV = $255,693.91/(1+13.6%)^4

Present value of TV = $255,693.91/1.136^4

Present value of TV = $255,693.91/1.66538

Present value of TV = 153534.8749234409

Present value of TV = $153,534.87

So, the value of the firm at Time 4 is $153,534.87