Misra Inc.forecasts a free cash flow of $80 million in Year 3,i.e. ,at t = 3,and it expects FCF to grow at a constant rate of 5.5% thereafter.If the weighted average cost of capital (WACC)is 10.0% and the cost of equity is 15.0%,then what is the horizon,or continuing,value in millions at t = 3?

Question

Quizplus · Accepted Answer

The correct answer is A. The horizon value is the present value of the FCFs beyond the explicit forecast period, which is perpetuity in this case. The formula for the horizon value is:Horizon Value = FCF * (1 + g) / (WACC - g)where:FCF = Free cash flow at the end of the explicit forecast periodg = Constant growth rateWACC = Weighted average cost of capitalPlugging in the given values, we get:Horizon Value = $80 million * (1 + 0.055) / (0.100 - 0.055) = $1,876 million

Misra IncForecasts a Free Cash Flow of $80 Million in Year