Mooradian Corporation's free cash flow during the just-ended year (t = 0) was $150 million, and its FCF is expected to grow at a constant rate of 5.0% in the future. If the weighted average cost of capital is 12.5%, what is the firm's value of operations, in millions?

Question

Quizplus · Accepted Answer

The value of operations can be calculated using the formula:

Value of operations = FCF / (WACC - g)

Where: 
FCF = Free cash flow in the current year = $150 million 
WACC = Weighted average cost of capital = 12.5% 
g = Expected growth rate of FCF = 5.0%

Substituting the values in the formula:

Value of operations = $150 million / (0.125 - 0.05) = $2,100 million

Therefore, the option C, $2,100, is the correct answer.

Mooradian Corporation's Free Cash Flow During the Just-Ended Year (T