A company currently has $6.1 million in free cash flows and expects to have $8.4 million in the last year of its 5-year plan. If its weighted cost of capital is 12%, and its tax rate is 25%, what is its terminal value?

Question

Quizplus · Accepted Answer

The terminal value is calculated using the formula for a perpetuity: Terminal Value = Final Year Cash Flow * (1 + g) / (WACC - g), where g is the growth rate, which in this case is assumed to be the inflation rate or a rate that maintains the purchasing power of the cash flows, since it's not provided. Assuming a growth rate of 0% for simplicity (as it's not given), the formula simplifies to Terminal Value = Final Year Cash Flow / WACC. Plugging in the numbers: $8.4 million / 0.12 = $70.0 million.

A Company Currently Has $6