Answer:
Present value of the firm = $ 524,467.50
Explanation:
Using the free cash flow, the value of a firm is the the present value of the free cash discounted at the appropriate cost of capital.
Year PV
1 62,000× (1.145)^(-1) = 54,148.47162
2 65,400 × (1.145)^(-2) = 49,884.63225
3 68,900 × (1,145)^(-3) = 45, 898.95119
4 to infinity ( see working below) $374,535.44
Workings
Present value from Year 4 to infinity (this will be done in two steps)
Step 1
PV in year 3 = FCF × (1+g)/(WACC- g)
FCF -68,900, g =2%, WACC - 14.5%
= ( 68,900 × 1.02(/0.145-0.02)
= $562,224.00
Step 2
PV in year 0 = PV in year 3 × (1+r)^(-3)
= $562,224.00 × (1.145^(-3)
= $374,535.44
The present value of Allison =
54,148.47 + 49,884.63 +45,898.95 +374,535.44
= $ 524,467.50
Present value of the firm = $ 524,467.50
