Income approaches: Rentech, 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 annum. 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.The enterprise value of the business is the sum of the present value of the free cash flows and the present value of the terminal value. The present value of the free cash flows is calculated as follows:PV of FCF = $342.5 million / (1 + 0.1125)^1 + $512.3 million / (1 + 0.1125)^2 + $750 million / (1 + 0.1125)^3 = $1,404.8 millionThe present value of the terminal value is calculated as follows:PV of TV = $750 million * (1 + 0.08) / (0.1125 - 0.08) = $17,762.2 millionThe enterprise value of the business is therefore:EV = PV of FCF + PV of TV = $1,404.8 million + $17,762.2 million = $19,367 million

Income Approaches: Rentech, Inc