Factrack Inc., a biotech firm, is expected to grow rapidly in the next three years and then have a level growth rate for the foreseeable future. The firm 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 percent per year. The company has no nonoperating assets (NOA). If the appropriate WACC is 11.25 percent, what is the enterprise value of this business? (Round to the nearest million.)

Question

Quizplus · Accepted Answer

The correct answer is A because the enterprise value of this business is $19,367 million. This is calculated by taking the sum of the present value of the free cash flows for the next three years and the present value of the terminal value. The present value of the free cash flows for the next three years is calculated by discounting each cash flow back to the present at the WACC of 11.25%. The present value of the terminal value is calculated by taking the perpetuity formula and discounting it back to the present at the WACC of 11.25%.