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Vasudevan, Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost...

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Finance

Vasudevan, Inc. forecasts the free cash flows (in millions)shown below. If the weighted average cost of capital is 15% and thefree cash flows are expected to continue growing at the same rateafter Year 3 as from Year 2 to Year 3, what is the Year 0 value ofoperations, in millions? Enter your answer rounded to two decimalplaces. Do not enter $ or comma in the answer box. For example, ifyour answer is $12,300.456 then enter as 12300.46 in the answerbox.                           

YearFree Cash Flow
1$         (22.00)
2$         42.00
3$         45.00

Answer & Explanation Solved by verified expert
4.3 Ratings (632 Votes)

Solution:
Answer is Year 0 value of operations 445.69 millions
Working Notes:
constant growth rate
= (year 3 value - Year 2 value)/year 2 value
=(45-42)/42
=3/42
=0.07142857
g=7.14285714%
cost of capital (Ke) = 15%
Value of operation at end of 3rd year
= year 3 cash flow x (1+g)/(ke - g)
=45 x (1.0714285714)/(0.15-0.07142857)
=613.6363525
Calculation of value of operation at year 0
Year Cash flow PVF @15% Present value
1 -22 0.869565217 -19.13043478
2 42 0.756143667 31.75803403
3 45 0.657516232 29.58823046
3 613.6363525 0.657516232 403.4758626
value of operation at year 0 445.69
Please feel free to ask if anything about above solution in comment section of the question.

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Transcribed Image Text

Vasudevan, Inc. forecasts the free cash flows (in millions)shown below. If the weighted average cost of capital is 15% and thefree cash flows are expected to continue growing at the same rateafter Year 3 as from Year 2 to Year 3, what is the Year 0 value ofoperations, in millions? Enter your answer rounded to two decimalplaces. Do not enter $ or comma in the answer box. For example, ifyour answer is $12,300.456 then enter as 12300.46 in the answerbox.                           YearFree Cash Flow1$         (22.00)2$         42.003$         45.00

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