The free cash flows (in millions)shown below are forecast by Simmons Inc.If the weighted average cost of capital is 13% 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 Year 0 value of operations,in millions? $\begin{array}{lccc}
\text { Year: } & 1 & 2 & 3 \

\text { Free cash flow: } & -\$ 20 & \$ 42 & \$ 45
\end{array}$

Question

The free cash flows (in millions)shown below are forecast by Simmons Inc.If the weighted average cost of capital is 13% 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 Year 0 value of operations,in millions? $\begin{array}{lccc}
\text { Year: } & 1 & 2 & 3 \

\text { Free cash flow: } & -\$ 20 & \$ 42 & \$ 45
\end{array}$

Quizplus · Accepted Answer

$\begin{array}{lccc} \text { Year: } & 1 & 2 & 3 \ \text { Free cash flow: } & -\$ 20 & \$ 42 & \$ 45 \end{array}$ WACC: 13% First,find the growth rate: g = $45/$42 F1F1F1S1F1F1F10 1.0 = 7.14% Second,find the horizon,or terminal,value,at Year 2: HV₂ = FCF₃/(WACC F1F1F1S1F1F1F10 g)= $45/(0.13 F1F1F1S1F1F1F10 0.0714)= $768 Now find the PV of the FCFs and the horizon value: Value of operations = F1F1F1S1F1F1F10$20/(1.13)+ ($42 + $768)/(1.13)² = $617

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