Can someone please show this using Cash Flow keys in BA II Plus calculator? I kn
ID: 2786665 • Letter: C
Question
Can someone please show this using Cash Flow keys in BA II Plus calculator? I know the answer is 167$, however, I can't get the same result using CF keys
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 $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm’s value of operations, in millions?
Explanation / Answer
As this is a case of growing perpetuity, we need to use the dividend growth model,
Price today, P0 = CF1 / (r - g), where CF1 - Cash Flow for next year, r - cost of capital and g - growth in cash flows going ahead.
In this case, the cash flow will grow from year 2
Terminal Value in year 1 (TV) = FCF2 / (r - g) = 20 / (14% - 4%) = 20 / 10% = $200 million
Now, firm value today = (FCF1 + TV) / (1 + r) = (200 - 10) / (1 + 14%) = $167 million