Compute the value of a firm with free cash flows of $1 000, $2 500 and $3 000 over the next three years, a terminal firm value of $40 000 after three years, and the unlevered cost of capital is 15%. Assume that the interest rate tax shield is zero.
A)$31 033
B)$27 234
C)$39 343
D)$26 191

Question

Quizplus · Accepted Answer

To compute the value of the firm, we discount the free cash flows and the terminal value back to the present value using the unlevered cost of capital (15%). The formula for the present value (PV) of each cash flow is PV = CF / (1 + r)^t, where CF is the cash flow, r is the discount rate (15% in this case), and t is the time in years.1. Year 1 cash flow: $1,000 / (1 + 0.15)^1 = $869.572. Year 2 cash flow: $2,500 / (1 + 0.15)^2 = $1,889.963. Year 3 cash flow: $3,000 / (1 + 0.15)^3 = $2,031.064. Terminal value in Year 3: $40,000 / (1 + 0.15)^3 = $26,242.62Adding these values together gives the total value of the firm: $869.57 + $1,889.96 + $2,031.06 + $26,242.62 = $31,033.21, which rounds to $31,033.

Compute the Value of a Firm with Free Cash Flows