The following table presents forecasted financial and other information for Scott's Miracle-Gro Co.: What is an appropriate estimate of Scott's terminal value of equity as of the end of 2014?

Question

The following table presents forecasted financial and other information for Scott's Miracle-Gro Co.:  What is an appropriate estimate of Scott's terminal value of equity as of the end of 2014?

Quizplus · Accepted Answer

To calculate the terminal value of equity, we can use the Gordon Growth Model. 
Terminal value of equity = (FCFn*(1+g))/(WACC-g), where FCFn is the free cash flow in the last projected year, g is the expected growth rate, and WACC is the weighted average cost of capital. 
Using the given information, we can calculate:
FCF2015 = $522.3 million 
g = 2% (assumed long-term growth rate)
WACC = 8.09% (given in the table)
Therefore, the terminal value of equity is:
TV = (FCF2015*(1+g))/(WACC-g) = $4,207.5 million. 
The answer is C.

The Following Table Presents Forecasted Financial and Other Information for Scott's