You are trying to estimate the value of the XYZ Inc. company, as of the end of 2019. The after-tax cashflow from assets (FCFF) for the year ending 2019 is $126 million. The estimated WACC is 11%. What comes closest to the current value of the firm XYZ if the expected after-tax cashflows to assets for the next two years are expected to grow at 15% and then grow at a lower rate of 2% thereafter forever?

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abdulmajeedabiodunac abdulmajeedabiodunac · Answer 1 · 2020-12-03T01:31:10+01:00

Answer:

$ 1,798.56

Explanation:

The current value of the firm is the discounted after-tax cashflow from assets as well as the terminal after-tax cashflows as shown below:

2020 FCFF=$126 million*(1+15%)=$144.90 million

2021 FCFF=$126 million*(1+15%)^2=$166.64 million

Terminal value=2021 FCFF*(1+g)/(WACC-g)

g=terminal growth rate of FCFF=2%

WACC=11%

Terminal value=$166.64 million*(1+2%)/(11%-2%)=$ 1,888.53 million

current value of firm=$144.90 million/(1+11%)^1+$166.64 million/(1+11%)^2+$ 1,888.53 million/(1+11%)^2

current value of firm=$ 1,798.56