Kedia Inc. forecasts a negative free cash flow for the coming year, FCF1 = -$10 million, but it expects positive numbers thereafter, with FCF2 = $25 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14.0%, what is the firm's total corporate value, in millions?

Question

Quizplus · Accepted Answer

The correct answer is B. The total corporate value is the sum of the present value of the negative free cash flow in Year 1 and the present value of the positive free cash flows in Years 2 and beyond. The present value of the negative free cash flow in Year 1 is -$10 million / (1 + 0.14)^1 = -$8.77 million. The present value of the positive free cash flows in Years 2 and beyond is $25 million / (0.14 - 0.04) = $210.53 million. Therefore, the total corporate value is -$8.77 million + $210.53 million = $201.76 million.

Kedia Inc Forecasts a Negative Free Cash Flow for the Coming