The Granite Paving Company is all-equity financed and has the following free cash flows in years 1-4: $3 million ($3M); $3.7M; $4M; $4.2M.After year 4,the firm is expected to grow at a sustainable rate of 3% per annum.With a WACC of 12%,what is the horizon value in year 4 of Granite Paving Co?

Question

Quizplus · Accepted Answer

To calculate the horizon value of the company at year 4 we need to first calculate the terminal value of the company:

Terminal value = (Free cash flow in year 5 x (1+growth rate)) / (WACC - growth rate)
Terminal value = (4.2 x (1+0.03)) / (0.12 - 0.03) = $48.1M

Therefore, the horizon value in year 4 is equal to the terminal value, which is $48.1M.

The correct answer is D.

The Granite Paving Company Is All-Equity Financed and Has the Following