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Suppose Leonard, Nixon, & Shull Corporation's projected free cash flow for next year is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company's weighted average cost of capital is 11%, what is the value of its operations?

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federicoceverino

Answer:

The value of its operations is 2,120,000.

Explanation:

The value of the company is equal to the present value of the future cash flows. It could be calculated in many ways, but one of the simplest is

[tex]\frac{FCF.year1 * (1+G)}{WACC-G}[/tex]

Where G is the expected grow rate, and WACC is the cost of capital.

In this case, the value will be equal to

[tex]\frac{100,000 * (1.06)}{0.11-0.06} = 2,120,000.00[/tex]

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