Misra Inc.forecasts a free cash flow of $35 million in Year 3,i.e.,at t = 3,and it expects FCF to grow at a constant rate of 5.5% thereafter.If the weighted average cost of capital (WACC)is 10.0% and the cost of equity is 15.0%,what is the horizon,or continuing,value in millions at t = 3?

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Quizplus · Accepted Answer

The horizon value is the present value of the FCFs beyond the explicit forecast period. Using the Gordon growth model, the horizon value at t = 3 is:Horizon value = FCF at t = 3 * (WACC - g) / (WACC - g)= $35 million * (0.10 - 0.055) / (0.10 - 0.055)= $35 million * 0.045 / 0.045= $35 million= $821 million

Misra IncForecasts a Free Cash Flow of $35 Million in Year