Question #6534

5. Vasudevan Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the Year 0 value of operations, in millions?

Year: 1 2 3

Free cash flow: -$20 $42 $45

a. $586

b. $617

c. $648

d. $680

e. $714

Year: 1 2 3

Free cash flow: -$20 $42 $45

a. $586

b. $617

c. $648

d. $680

e. $714

Expert's answer

The right answer is **D. 680 $**

We used dividend growth model ( here is a pretty decent explanation of this model), then NPV.

Finally we got NPV = -201,07 + 421,07^2 + 802,51,07^3

We used dividend growth model ( here is a pretty decent explanation of this model), then NPV.

Finally we got NPV = -201,07 + 421,07^2 + 802,51,07^3

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