Gupta Corporation is undergoing a restructuring,and its free cash flows are expected to vary considerably during the next few years.However,the FCF is expected to be $25.00 million in Year 5,and the FCF growth rate is expected to be a constant 6.5% beyond that point.The weighted average cost of capital is 12.0%.What is the horizon (or continuing)value (in millions)at t = 5?

Question

Quizplus · Accepted Answer

The horizon (or continuing) value at t = 5 can be calculated using the formula for the value of a perpetuity growing at a constant rate: $ \text{Value} = \frac{\text{FCF}_{t+1}}{(WACC - g)} $, where $ \text{FCF}_{t+1} $ is the free cash flow in Year 6, WACC is the weighted average cost of capital, and $ g $ is the growth rate. Given that the FCF in Year 5 is $25 million and is expected to grow at a rate of 6.5% thereafter, the FCF in Year 6 ($ \text{FCF}_{t+1} $) would be $25 million * (1 + 0.065) = $26.625 million. Plugging these values into the formula gives: $ \text{Value} = \frac{26.625}{(0.12 - 0.065)} = \frac{26.625}{0.055} = $484 $ million.

Gupta Corporation Is Undergoing a Restructuring,and Its Free Cash Flows