Pick a CFFA 0 between $2,000,000 and $3,500,000 annually for a constant growth f
ID: 2617391 • Letter: P
Question
Pick a CFFA0 between $2,000,000 and $3,500,000 annually for a constant growth firm. We will call this firm the subject firm, and we will assume that this firm’s cash flows from assets are growing at a constant rate of 2% annually. Comparable constant growth firms are selling for $50,000,000 with CFFA0 of $2,750,000 and have a constant growth rate in their Cash Flows from Assets of 3%. Furthermore, assume that you have no reliable way to calculate the subject firm’s WACC. Given all of these conditions, you are to provide an estimate of value for the subject firm. Explain in detail.
Explanation / Answer
Value=CFFA0*(1+g)/(WACC-g)
50000000=2750000*(1+3%)/(WACC-3%)
=>WACC of comparable firms=2750000*(1+3%)/50000000+3%=5.83495%
Assuming the subject firm is also having the same WACC
Hence, value of subject firm assuming CFFA0 to be 3000000=3000000*(1+2%)/(5.83495%-2%)=79,792,435.3642