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# Answer to Question #6531 in Economics of Enterprise for LaMarcus Streeter

Question #6531
2. Leak Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments).
Year: 1 2
Free cash flow: -$50$100

a. $1,456 b.$1,529
c. $1,606 d.$1,686
e. $1,770 Expert's answer Terminal Value in year 2 = CF3/(Ke-g) where CF3 = cash flow in year 3 = 100X1.05 = 105 Ke = required return = 11% g = growth rate = 5% Terminal value in year 2 = 105/(11%-5%) = 1,770 e.$1,770

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