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# Answer to Question #6529 in Economics of Enterprise for LaMarcus Streeter

Question #6529
1. Suppose Leonard, Nixon, & Shull Corporation&rsquo;s projected free cash flow for next year is \$100,000, and FCF is expected to grow at a constant rate of 6%. If the company&rsquo;s weighted average cost of capital is 11%, what is the value of its operations? a. \$1,714,750 b. \$1,805,000 c. \$1,900,000 d. \$2,000,000 e. \$2,100,000
1
2012-02-16T09:27:07-0500
a. \$1,714,750
b. \$1,805,000
c. \$1,900,000
d. \$2,000,000
e. \$2,100,000

Solution:

Calculate Horizon value = FCF*(1+ growth rate)/(WACC &ndash; growth rate) = \$100 000 * 1,06 / (0,11 &ndash; 0,6) =
=\$2 120 000

Calculate Present value = CF / (1+WACC)^t, t &ndash; time period

[table]Yearly earnings Present value100 000,0090 090,092 120 000,001 909 909,91[/table]
The value of operation = &sum; CFs = \$90 090,09 + \$1 909 909,91 = \$2 000 000

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