Ellis Manufacturing Inc.has estimated FCFF for each of the next five years and believes that subsequent cash flows will grow at a constant annual rate of 3% indefinitely.If FCFF are $4,500,000 in year five,and the cost of capital is 9%,what is the value TODAY of these terminal value cash flows?
A)$48,744,854
B)$50,207,200
C)$77,250,000
D)There is not enough information to answer this question.

Question

Quizplus · Accepted Answer

To calculate the terminal value, we use the formula TV = FCFFn+1 / (r-g), where FCFFn+1 is the cash flow in the next period (year 6), r is the cost of capital, and g is the constant annual growth rate.

TV = $4,500,000 / (9% - 3%) = $75,000,000

To find the present value of the terminal value, we discount it back to the present using the formula PV = TV / (1+r)^n, where n is the number of years from now to the terminal year (in this case, 5 years).

PV = $75,000,000 / (1+9%)^5 = $50,207,200

Therefore, the correct answer is B.