Akyol Corporation is undergoing a restructuring, and its free cash flows are expected to be unstable during the next few years. However, FCF is expected to be $50 million in Year 5, i.e., FCF at t = 5 equals $50 million, and the FCF growth rate is expected to be constant at 6% beyond that point. If the weighted average cost of capital is 12%, what is the horizon value (in millions) at t = 5?

Question

Quizplus · Accepted Answer

To calculate the horizon value, we need to first calculate the terminal value at Year 5, which is the present value of all future cash flows beyond that point. The formula to calculate terminal value is:

Terminal value = FCF at Year 5 x (1 + growth rate) / (discount rate - growth rate)

Here, FCF at Year 5 is $50 million, growth rate is 6%, and discount rate is 12%. So, the terminal value at Year 5 is:

Terminal value = $50 million x (1 + 6%) / (12% - 6%) = $966.67 million

Next, we need to discount this terminal value back to Year 0 using the formula:

Horizon value = Terminal value / (1 + discount rate)^n

Here, n is the number of years between Year 5 and Year 0, which is 5. So, the horizon value at Year 5 is:

Horizon value = $966.67 million / (1 + 12%)^5 = $883.30 million

Therefore, the correct answer is C) $883.

Akyol Corporation Is Undergoing a Restructuring, and Its Free Cash