A company forecasts growth of 6 percent for the next five years and 3 percent thereafter. Given last year's free cash flow was $100, what is its horizon value (PV looking forward from year 4)if the company cost of capital is 8 percent?

Question

Quizplus · Accepted Answer

The horizon value is calculated using the formula for the perpetuity growth model: Horizon Value = FCF * (1 + g) / (r - g), where FCF is the free cash flow at the end of the high growth period, g is the growth rate, and r is the cost of capital. The free cash flow at the end of year 5 is $100 * (1.06)^5. The horizon value at year 5 is then calculated using the growth rate of 3% and cost of capital of 8%.

A Company Forecasts Growth of 6 Percent for the Next