Answer to Question #6530 in Economics of Enterprise for LaMarcus Streeter
Year: 1 2
Free cash flow: -$50 $100
Using the dividend growth model we have: C2 = FCF of year 3 / (WACC - Growth). FCF of year 3 = 100*(1+0.05) = 105. Thus, C2 = 105 / (11%-5%) = 1,750.
Now we need to calculate NPV: where t - the time of the cash flow; r - the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.); the
opportunity cost of capital; Ct is the net cash flow (the amount of cash, inflow minus outflow) at time t.
NPV = (50)/(1+0,11) + 100/(1+0,11)^2 + 1750/(1+0,11)^2 = 1 456, 46.
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