Income approaches: Rentech Ltd company a biotech company, is expected to grow rapidly in the next three years and then have a level growth rate for the foreseeable future. The company expects free cash flows of $342.5 million, $512.3 million, and $750 million over the next three years, and thereafter its cash flows will grow at a steady rate of 8 per cent per annum. The company has no non-operating assets (NOA). If the appropriate WACC is 11.25 per cent, what is the enterprise value of this business? Round to the nearest million.

Question

Quizplus · Accepted Answer

The correct answer is A.The enterprise value of the business is the present value of the free cash flows plus the present value of the terminal value. The terminal value is the present value of the cash flows in perpetuity, which is calculated as the free cash flow in the last year divided by the discount rate minus the growth rate. In this case, the terminal value is $750 million / (0.1125 - 0.08) = $18,750 million. The present value of the free cash flows is $342.5 million / (1 + 0.1125)^1 + $512.3 million / (1 + 0.1125)^2 + $750 million / (1 + 0.1125)^3 = $1,547 million. Therefore, the enterprise value of the business is $18,750 million + $1,547 million = $20,297 million. Rounding to the nearest million, the answer is $20,300 million.

Income Approaches: Rentech Ltd Company a Biotech Company, Is Expected