Heath and Logan Inc.forecasts the free cash flows (in millions)shown below.The weighted average cost of capital is 13%,and the FCFs are expected to continue growing at a 5% rate after Year 3.Assuming that the ROIC is expected to remain constant in Year 3 and beyond,what is the Year 0 value of operations,in millions? $\begin{array}{lccc}
\text { Year: } & 1 & 2 & 3 \
\hline \text { Free cash flow: } & -\$ 15 & \$ 10 & \$ 40
\end{array}$

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$\begin{array}{lccc} \text { Year: } & 1 & 2 & 3 \ \hline \text { FCF: } & -\$ 15 & \$ 10 & \$ 40 \end{array}$ $\begin{array}{lccc} \text { g: } & 5 \% \ \text { WACC: } &15 \% \end{array}$ First,find the horizon,or terminal,value: HV₄ = FCF₃(1 + g)/(WACC F1F1F1S1F1F1F10 g)= $40(1.05)/(0.13 F1F1F1S1F1F1F10 0.05)= $525 Then find the PV of the free cash flows and the horizon value: Value of operations = F1F1F1S1F1F1F10$15/(1.13)+ $10/(1.13)² + ($40 + $525)/(1.13)³ = $386

Heath and Logan Inc Year: 123 Free cash flow: −$15$10$40\begin{array}{lccc}\text { Year: } & 1 & 2 & 3 \\\hline \text { Free cash flow: } & -\$ 15 & \$ 10 & \$ 40\end{array} Year: Free cash flow: ​1−$15​2$10​3$40​​

Heath and Logan Inc $\begin{array}{lccc}\text { Year: } & 1 & 2 & 3 \\\hline \text { Free cash flow: } & -\$ 15 & \$ 10 & \$ 40\end{array}$