The free cash flows (in millions) shown below are forecast by Parker & Sons. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millionsσ Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments).
$\begin{array}{lccc}
\text { Year: } & 1 & 2 \
\hline \text { Free cash flaw: } & -\$ 50& \$ 100
\end{array}$

A) $1,456
B) $1,529
C) $1,606
D) $1,686
E) $1,770

Question

The free cash flows (in millions) shown below are forecast by Parker & Sons. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millionsσ Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments).
 $\begin{array}{lccc}
\text { Year: } & 1 & 2 \
\hline \text {  Free cash flaw: } & -\$ 50& \$ 100 
\end{array}$

A) $1,456
B) $1,529
C) $1,606
D) $1,686
E) $1,770

Quizplus · Accepted Answer

$\begin{array}{lr}
\mathrm{FCF}_{1}: & -\$ 50 \
\mathrm{FCF}_{2}: & \$ 100 \
\mathrm{~g}: & 5 \% \
\mathrm{WACC} & 11 \%
\end{array}$ 
First, find the horizon, or terminal, value: HV2 = FCF2(1 + g)/(WACC - g) = $100(1.05)/(0.11- 0.05) = $1,750.00 Then find the PV of the free cash flows and the horizon value: Value of operations = σ$50/(1.11) + ($100 + $1,750)/(1.11)2 = $1,456

The Free Cash Flows (In Millions) Shown Below Are Forecast Year: 12 Free cash flaw: −$50$100\begin{array}{lccc}\text { Year: } & 1 & 2 \\\hline \text { Free cash flaw: } & -\$ 50& \$ 100 \end{array} Year: Free cash flaw: ​1−$50​2$100​​

The Free Cash Flows (In Millions) Shown Below Are Forecast $\begin{array}{lccc}\text { Year: } & 1 & 2 \\\hline \text { Free cash flaw: } & -\$ 50& \$ 100 \end{array}$