Young & Liu Inc.'s free cash flow during the just-ended year (t = 0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future.If the weighted average cost of capital is 15%, what is the firm's value of operations, in millions?
A) $948
B) $998
C) $1,050
D) $1,103
E) $1,158

Question

Quizplus · Accepted Answer

The value of operations can be calculated using the formula for the value of a growing perpetuity: $ \text{Value} = \frac{\text{FCF}_1}{WACC - g} $, where $ \text{FCF}_1 $ is the free cash flow in the next period (t = 1), WACC is the weighted average cost of capital, and g is the growth rate. Given that FCF at t = 0 is $100 million and is expected to grow at a constant rate of 5%, the FCF at t = 1 will be $100 million * (1 + 0.05) = $105 million. With a WACC of 15%, the value of operations is calculated as $ \frac{105}{0.15 - 0.05} = \frac{105}{0.10} = $1,050 $ million.