Grayson Scaffolding Inc. has a cost of capital of 9% and the following free cash flow projections over their five-year planning horizon: $3.4 million, 3.8 million, $4.5 million, $4.9 million, and $5.2 million. Using free cash flows, what is the total business value?

Question

Quizplus · Accepted Answer

To calculate the total business value using free cash flows, we need to use the formula:
Total Business Value = (FCF1 / (1 + r)^1) + (FCF2 / (1 + r)^2) + ... + (FCFn / (1 + r)^n) + (Terminal Value / (1 + r)^n)
where r is the cost of capital and n is the number of years in the planning horizon. 
Using the data provided, we get:
Total Business Value = (3.4 / 1.09) + (3.8 / 1.09^2) + (4.5 / 1.09^3) + (4.9 / 1.09^4) + (5.2 / 1.09^5) + (5.2 * (1 + 0.03) / (1.09^5 * (0.09 - 0.03)))
Total Business Value = $54.2 million (rounded to the nearest tenth) 
Therefore, the best choice is C.