The free cash flows (in millions)shown below are forecast by Parker & Sons.If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2,what is the Year 0 value of operations,in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments). $$\begin{array}{l}

\begin{array} { c c }
\text {Year: }~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 1 & 2 \
\hline
\text {Free cash flow:}- \mathbf { \$50 } & \mathbf { \$100 }
\end{array}
\end{array}$$

Question

The free cash flows (in millions)shown below are forecast by Parker & Sons.If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2,what is the Year 0 value of operations,in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments). $$\begin{array}{l}

\begin{array} { c c } 
\text {Year: }~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 1 & 2 \
\hline 
\text {Free cash flow:}- \mathbf { \$50 } & \mathbf { \$100 }
\end{array}
\end{array}$$

Quizplus · Accepted Answer

$\begin{array}{lr} \mathrm{FCF}_{1} & -\$ 50 \ \mathrm{FCF}_{2} & \$ 100 \ \mathrm{~g} & 5 \% \ \mathrm{WACC} & 11 \% \end{array}$ First,find the horizon,or terminal,value: HV₂ = FCF₂(1 + g)/(WACC F1F1F1S1F1F1F10 g)= $100(1.05)/(0.11 F1F1F1S1F1F1F10 0.05)= $1,750.00 Then find the PV of the free cash flows and the horizon value: Value of operations = F1F1F1S1F1F1F10$50/(1.11)+ ($100 + $1,750)/(1.11)² = $1,456

The Free Cash Flows (In Millions)shown Below Are Forecast by Parker