Answer to Question #6534 in Economics of Enterprise for LaMarcus Streeter
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
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