The Granite Paving Company is all-equity financed and has the following free cash flows in years 1−4: $3 million ($3M); $3.7M; $4M; $4.2M. After year 4, the firm is expected to grow at a sustainable rate of 3 percent per annum. With a WACC of 12 percent, what is the horizon value in year 4 of Granite Paving Co?

Question

Quizplus · Accepted Answer

The formula for calculating the horizon value is:

Horizon value = Terminal year free cash flow x (1 + sustainable growth rate) / (discount rate - sustainable growth rate)

Terminal year free cash flow = $4.2M
Sustainable growth rate = 3%
Discount rate = 12%

Horizon value = $4.2M x (1 + 3%) / (12% - 3%) = $48.1M

Therefore, the horizon value in year 4 of Granite Paving Co is $48.1M. The answer is D.

The Granite Paving Company Is All-Equity Financed and Has the Following