The following table presents forecasted financial and other information for Havasham Industries:
What is an appropriate estimate of Havasham's terminal value as of the end of 2014,using a warranted multiple of free cash flow as your estimate?
$$\begin{array} { l r r r }
& 2012 & 2013 & 2014 \
\hline \text { Projected EBIT } & \$ 317 & \$ 339 & \$ 363 \
\text { Earnings after tax } & 197 & 210 & 225 \
\text { Free cash flow } & 135 & 144 & 155 \
& & & \
\text { Havasham's WACC } & 8.2 \% & & \
\text { Expected growth rate in FCFs after } 2014 & 4.0 \% & & \
\text { Warranted MV firm } / \mathrm { FCF } \text { in } 2014 & 19.4 & & \
\text { Warranted } \mathrm { P } / \mathrm { E } \text { in } 2014 & 18.7 & & \
\hline
\end{array}$$

Question

The following table presents forecasted financial and other information for Havasham Industries:
What is an appropriate estimate of Havasham's terminal value as of the end of 2014,using a warranted multiple of free cash flow as your estimate?
$$\begin{array} { l r r r } 
& 2012 & 2013 & 2014 \
\hline  \text { Projected EBIT } & \$ 317 & \$ 339 & \$ 363 \
\text { Earnings after tax } & 197 & 210 & 225 \
\text { Free cash flow } & 135 & 144 & 155 \
& & & \
\text { Havasham's WACC } & 8.2 \% & & \
\text { Expected growth rate in FCFs after } 2014 & 4.0 \% & & \
\text { Warranted MV firm } / \mathrm { FCF } \text { in } 2014 & 19.4 & & \
\text { Warranted } \mathrm { P } / \mathrm { E } \text { in } 2014 & 18.7 & & \
\hline
\end{array}$$

Quizplus · Accepted Answer

To calculate the terminal value, we use the formula: 
Terminal Value = Year 5 Free Cash Flow * (1 + Expected Growth Rate) / (WACC - Expected Growth Rate)
Plugging in the values, we get:
Terminal Value = $1,399.7 million * (1+2%) / (8%-2%) = $3,007.0 million.
This corresponds to choice C.

The Following Table Presents Forecasted Financial and Other Information for Havasham