Kale Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2, what is the firm's total corporate value, in millions? $$\begin{array} { l r r }
\text { Year } & 1 & 2 \
\hline \text { Free cash flow } & - \$ 50 & \$ 100
\end{array}$$

Question

Kale Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2, what is the firm's total corporate value, in millions? $$\begin{array} { l r r } 
\text { Year } & 1 & 2 \
\hline \text { Free cash flow } & - \$ 50 & \$ 100
\end{array}$$

Quizplus · Accepted Answer

The correct answer is A because the total corporate value is $1,456 million. This is calculated by using the perpetuity growth model, which is:```Value = FCF / (WACC - Growth Rate)```Where:* FCF is the free cash flow* WACC is the weighted average cost of capital* Growth Rate is the expected growth rate of FCFIn this case, the FCF is $100 million, the WACC is 11.0%, and the Growth Rate is 5.0%. Plugging these values into the formula, we get:```Value = 100 / (0.11 - 0.05) = $1,456 million```

Kale Inc Forecasts the Free Cash Flows (In Millions) Shown Below