Zhdanov inc. forecasts that its free cash flow in the coming year, i. e., at t = 1, will be -$10 million, but its fcf at t = 2 will be $10 million. after year 2, fcf is expected to grow at a constant rate of 5% forever. if the weighted average cost of capital is 15%, what is the firm’s value of operations, in millions?

Ans. The firm’s value of operations, in millions is $82.61 millions

Explanation:

Hi, we need to bring to present value all cash flows, so we need to bring the -10 million to present and the perpetuity value too, the full equation to use is as follows.

Where:

CF(1)= -10

CF(2)=10

WACC=weighted average cost of capital

g= Constant growth rate

It should look like this.

the constant growth rate is found by the second part of the equation

And that brings all the future cash flows to 1 period before its first cash flow, but there is still one period to go in order to take it to present value, so we discounted with.

so the answer is $82.61 millions.

Best of luck.

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answer; institution based;