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

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Vasudevan, Inc. forecasts the free cash flows (in millions)shown below. If the weighted average cost of capital is 18% 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.
Year                     Free Cash Flow
1                           $ (22.00)
2                           $ 42.00
3                           $ 45.00

Answer & Explanation Solved by verified expert

3.9 Ratings (735 Votes)


	i	ii	iii	iv=ii+iii	v	vi=v*iv
	year	Cash flow	terminal value	Total cash flow	PVIF @ 18%	present value
	1	-22		(22.00)	1.0000	(22.00)
	2	42		42.00	0.8475	35.59
	3	45	444.08	489.08	0.7182	351.25
						364.84

therefore answer =			364.84


Growth % =		=45/42-1
		7.14%

Terminal value =			45*(1+7.14%)/(18%-7.14%)

			444.08

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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 18% 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.Year Free Cash Flow1 $ (22.00)2 $ 42.003 $ 45.00