Consider the following data for Kriya Company: $\begin{array} { r l l l l l }
\text { Year: } & 1 & 2 & 3 & 4 \
\text { Free Cash Flow (FCF) (in millions) : } & 4 & 5 & 6 & 6.24
\end{array}$ A constant growth rate of 4 percent is sustained forever after year 3.The weighted average cost of capital is 10 percent.
Calculate the value of the firm.
A)$90.4 million
B)$104 million
C)$82.6 million
D)$83.3 million

Question

Consider the following data for Kriya Company: $\begin{array} { r l l l l l } 
\text { Year: } & 1 & 2 & 3 & 4 \
\text { Free Cash Flow (FCF) (in millions) : } & 4 & 5 & 6 & 6.24
\end{array}$ A constant growth rate of 4 percent is sustained forever after year 3.The weighted average cost of capital is 10 percent.
Calculate the value of the firm.
A)$90.4 million
B)$104 million
C)$82.6 million
D)$83.3 million

Quizplus · Accepted Answer

The correct answer is A because the value of the firm is $90.4 million. This is calculated by using the formula for the value of a growing perpetuity, which is:Value of the firm = FCF / (WACC - g)where:FCF = free cash flowWACC = weighted average cost of capitalg = growth rateIn this case, the FCF is $6.24 million, the WACC is 10%, and the growth rate is 4%. Plugging these values into the formula, we get:Value of the firm = $6.24 million / (0.10 - 0.04) = $90.4 million