Income approaches: You are using the FCFC approach to value a business. The estimated FCFC for next year will be $13.6 million, and it will increase at a rate of 6 per cent for each of the following five years. After that point, the FCFC will increase at a rate of 3 per cent forever. If the WACC for this company is 8 per cent, what is it worth?

Question

Quizplus · Accepted Answer

The value of the business can be calculated using a two-stage growth model. First, calculate the present value of the FCFC for the first five years using the 6% growth rate and 8% WACC. Then, calculate the terminal value at the end of year five using the 3% perpetual growth rate and discount it back to the present value. Adding these two components gives approximately $384 million.

Income Approaches: You Are Using the FCFC Approach to Value