Free cash flow valuation You are evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating $42,600 of free cash flow (FCF, = $42,600). On the basis of a review of similar-risk investment opportunites, you must earn a(n) 18% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm's value using several possible assumptions about the growth rate of cash flows. a. What is the firm's value if cash flows are expected to grow at an annual rate of 0% from now to infinity? b. What is the firm's value if cash flows are expected to grow at a constant annual rate of 7% from now to infinity? c. What is the firm's value if cash flows are expected to grow at an annual rate of 11% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity? a. The firm's value, if cash flows are expected to grow at an annual rate of 0% from now to infinity, is S. (Round to the nearest cent.) b. The firm's value, if cash flows are expected to grow at a constant annual rate of 7% from now to infinity, is S. (Round to the nearest cent.) c. The firm's value, if cash flows are expected to grow at an annual rate of 11% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity, is S. (Round to the nearest cent.)
Free cash flow valuation You are evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating $42,600 of free cash flow (FCF, = $42,600). On the basis of a review of similar-risk investment opportunites, you must earn a(n) 18% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm's value using several possible assumptions about the growth rate of cash flows. a. What is the firm's value if cash flows are expected to grow at an annual rate of 0% from now to infinity? b. What is the firm's value if cash flows are expected to grow at a constant annual rate of 7% from now to infinity? c. What is the firm's value if cash flows are expected to grow at an annual rate of 11% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity? a. The firm's value, if cash flows are expected to grow at an annual rate of 0% from now to infinity, is S. (Round to the nearest cent.) b. The firm's value, if cash flows are expected to grow at a constant annual rate of 7% from now to infinity, is S. (Round to the nearest cent.) c. The firm's value, if cash flows are expected to grow at an annual rate of 11% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity, is S. (Round to the nearest cent.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:Free cash flow valuation You are evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating $42,600 of free cash flow (FCF,= $42,600). On the basis of a review of
similar-risk investment opportunites, you must earn a(n) 18% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm's value using several possible
assumptions about the growth rate of cash flows.
a. What is the firm's value if cash flows are expected to grow at an annual rate of 0% from now to infinity?
b. What is the firm's value
c. What is the firm's value
cash flows are expected to grow at a constant annual rate of 7% from now to infinity?
cash flows are expected to grow at an annual rate of 11% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity?
a. The firm's value, if cash flows are expected to grow at an annual rate of 0% from now to infinity, is $
(Round to the nearest cent.)
b. The firm's value, if cash flows are expected to grow at a constant annual rate of 7% from now to infinity, is S : (Round to the nearest cent.)
c. The firm's value, if cash flows are expected to grow at an annual rate of 11% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity, is S. (Round to the nearest cent.)
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