Income approaches: Maryland Electronics, an electronics manufacturer, is expected to grow rapidly in the next five years and then have a stable growth rate for the foreseeable future. The company expects free cash flows of $262.5 million next year. These cash flows are expected to grow at a 30 per cent rate over the following four years, and thereafter its cash flows will grow at a steady rate of 6 per cent per annum. The company has nonoperating assets (NOA) of $31 million in the form of cash. If the appropriate WACC is 9 per cent, what is the enterprise value of this business? Round to the nearest million.

Question

Quizplus · Accepted Answer

The enterprise value is calculated by finding the present value of the expected free cash flows during the high growth period and the present value of the terminal value, which accounts for the stable growth period. Adding the nonoperating assets gives the total enterprise value.

Income Approaches: Maryland Electronics, an Electronics Manufacturer, Is Expected to Grow