Question

Suppose Leonard, Nixon, & Shull Corporation's projected free cash flow for next year is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company's weighted average cost of capital is 11%, what is the value of its operations?

Answer 1

Answer:

The value of its operations is 2,120,000.

Explanation:

The value of the company is equal to the present value of the future cash flows. It could be calculated in many ways, but one of the simplest is

$\frac{FCF.year1 * (1+G)}{WACC-G}$

Where G is the expected grow rate, and WACC is the cost of capital.

In this case, the value will be equal to

$\frac{100,000 * (1.06)}{0.11-0.06} = 2,120,000.00$