Leak Inc.forecasts the free cash flows (in millions) shown below.If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2,what is the Year 0 value of operations,in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments). $\begin{array}{lll}
\text { Year: } & 1 & 2 \
\text { Free cash flow: } & -\$ 50 & \$ 100
\end{array}$

Question

Quizplus · Accepted Answer

The correct answer is A.The Year 0 value of operations is the present value of the free cash flows, discounted at the weighted average cost of capital. The free cash flows are -$50 million in Year 1 and $100 million in Year 2. After Year 2, the free cash flows are expected to grow at a rate of 5%. The weighted average cost of capital is 11%.The present value of the free cash flows is:PV = -$50 / (1 + 0.11)^1 + $100 / (1 + 0.11)^2 + $100 * (1 + 0.05) / (0.11 - 0.05) / (1 + 0.11)^2= -$50 / 1.11 + $100 / 1.2321 + $100 * 1.05 / 0.06 / 1.2321= -$44.68 + $81.20 + $864.19= $1,455.71The Year 0 value of operations is $1,455.71 million.

Leak IncForecasts the Free Cash Flows (In Millions) Shown Below Year: 12 Free cash flow: −$50$100\begin{array}{lll}\text { Year: } & 1 & 2 \\\text { Free cash flow: } & -\$ 50 & \$ 100\end{array} Year: Free cash flow: ​1−$50​2$100​

Leak IncForecasts the Free Cash Flows (In Millions) Shown Below $\begin{array}{lll}\text { Year: } & 1 & 2 \\\text { Free cash flow: } & -\$ 50 & \$ 100\end{array}$