Gere Furniture forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter.If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3?

Question

Quizplus · Accepted Answer

The horizon value at t = 3 can be calculated using the formula for the terminal value of a growing perpetuity: Horizon Value = FCF * (1 + g) / (WACC - g). Substituting the given values: Horizon Value = $40 million * (1 + 0.05) / (0.10 - 0.05) = $42 million / 0.05 = $840 million.

Gere Furniture Forecasts a Free Cash Flow of $40 Million