Question

Simonyan Inc. forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter. If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3?

Answer 1

Answer: $840 million

Explanation:

Given that,

Free cash flow = $40 million in Year 3

at  t = 3,

FCF to grow at a constant rate = 5%

Weighted average cost of capital (W) = 10%

Cost of equity (C) = 15%

Horizon Value at t = 3,

= Free Cash flow  × $\frac{1 + Growth\ rate}{C - W}$

= 40 ×  $\frac{1 + 0.05}{0.15 - 0.1}$

= 40 ×  $\frac{1.05}{0.05}$

= $840 million