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 as of the end of 2014,using a warranted multiple of free cash flow as your estimate?

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 as of the end of 2014,using a warranted multiple of free cash flow as your estimate?

Quizplus · Accepted Answer

To calculate the terminal value using the warranted multiple of free cash flow, we must first determine the free cash flow for 2014. Using the provided financial information, we can calculate that the free cash flow for 2014 is $268.5 million ($302.5 million in operating cash flow minus $34 million in capital expenditures). 
Next, we need to determine the warranted multiple. Based on comparable companies in the industry, a warranted multiple of 11.2x is appropriate for Scott's Miracle-Gro.
To calculate the terminal value, we multiply the free cash flow by the warranted multiple: $268.5 million x 11.2 = $3,007 million. Therefore, the appropriate estimate for Scott's terminal value as of the end of 2014 is $3,007 million, which is answer choice C.

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