question archive A company forecasts free cash flow of $40 million in three years
A company forecasts free cash flow of $40 million in three years
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A company forecasts free cash flow of $40 million in three years. It expects the free cash flow to grow at a constant rate of 5 percent thereafter. If the weighted average cost of capital is 12 percent and the cost of equity is 15 percent, what is the horizon value, to the nearest million?
$280 million
$400 million
$420 million
$840 million
$600 million
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Answer:
HORIZON VALUE = FCF*(1+g)/(WACC - g)
HORIZON VALUE = 40*(1+0.05)/(0.12-0.05) = 42/0.07 = 600
ANSWER : $600 MILLION
