Wall Inc. forecasts that it will have the free cash flows (in millions) shown below. If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the firm's total corporate value, in millions? $$\begin{array} { l r r r }
\text { Year } & 1 & 2 & 3 \
\hline \text { Free cash flow } & - \$ 20.00 & \$ 48.00 & \$ 54.00
\end{array}$$

Question

Wall Inc. forecasts that it will have the free cash flows (in millions) shown below. If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the firm's total corporate value, in millions? $$\begin{array} { l r r r } 
\text { Year } & 1 & 2 & 3 \
\hline \text { Free cash flow } & - \$ 20.00 & \$ 48.00 & \$ 54.00
\end{array}$$

Quizplus · Accepted Answer

The correct answer is B because the total corporate value is the sum of the present value of the free cash flows for the first three years plus the present value of the terminal value. The terminal value is calculated as the free cash flow in Year 3 multiplied by the growth rate and divided by the weighted average cost of capital minus the growth rate. The present value of the free cash flows for the first three years is calculated as the free cash flow in each year divided by the weighted average cost of capital raised to the power of the year. The total corporate value is then the sum of the present value of the free cash flows for the first three years and the present value of the terminal value.

Wall Inc Forecasts That It Will Have the Free Cash Flows