Bonza Corporation generated free cash flow of $80 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 7.5%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 3% per year. If the weighted average cost of capital is 15% and Bonza Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Bonza Corporation's expected terminal enterprise value in year 2?

Question

Quizplus · Accepted Answer

The terminal enterprise value in year 2 is calculated using the Gordon Growth Model: Terminal Value = FCF in Year 3 / (WACC - g). FCF in Year 3 is $80 million * (1 + 7.5%)^2 * (1 + 3%) = $92.58 million. Terminal Value = $92.58 million / (15% - 3%) = $793.53 million.

Bonza Corporation Generated Free Cash Flow of $80 Million This