Mirsa inc forecasts a free cash flow of $35 million in year 3, i.e., at t-3, and

Question

Mirsa inc forecasts a free cash flow of $35 million in year 3, i.e., at t-3, and expects FCF to grow at a constant rate of 5.5% thereafter. If the weighted average cost of capital is 10.0% and the cost of equity is 15%, what is the horizon, or terminal, value in millions at t-3? Mirsa inc forecasts a free cash flow of $35 million in year 3, i.e., at t-3, and expects FCF to grow at a constant rate of 5.5% thereafter. If the weighted average cost of capital is 10.0% and the cost of equity is 15%, what is the horizon, or terminal, value in millions at t-3?

Explanation / Answer

FCF at time 3 = $35M

Growth Rate = 5.5%

Since its its FCF to the FIRM not just to the equitywe'll use WACC as the cost of capital

Terminal value = (35*1.055)/(0.10-0.055) = $820.56M

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