Problem 11-6 Value of Operations Brooks Enterprises has never paid a dividend. F

Question

Problem 11-6 Value of Operations Brooks Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $90,000 for the next 2 years, respectively; after the second year FCF is expected to grow at a constant rate of 5%. The company?s weighted average cost of capital is 14%. a. What is the terminal, or horizon, value of operations? (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2.) Round your answer to the nearest dollar. b. Calculate the value of Brooks? operations. Round your answer to the nearest cent.

Explanation / Answer

i assumed the operation life of 10 years.

Terminal life PV of brooks operation year 1          80,000                                        70,175 year 2          90,000                                        69,252 year 3          94,500                        82,895                                        63,785 year 4          99,225                        76,350                                        58,749 year 5       104,186                        70,323                                        54,111 year 6       109,396                        64,771                                        49,839 year 7       114,865                        59,657                                        45,904 year 8       120,609                        54,948                                        42,280 year 9       126,639                        50,610                                        38,943 year 10       132,971                        46,614                                        35,868 Total                     506,168                                      528,907

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