If the capital structure is stable, and free cash flows are expected to be growing at a constant rate at the horizon date, then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.

Question

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The horizon value is calculated by using the Gordon Growth Model (or a similar perpetuity growth model) which involves dividing the free cash flow expected in the first year beyond the horizon (adjusted for constant growth) by the difference between the weighted average cost of capital (WACC) and the growth rate, without adding expected future tax shields in the formula. Tax shields are typically incorporated into the cash flows themselves or in the calculation of WACC.

If the Capital Structure Is Stable, and Free Cash Flows