# Answer on Other Management Question for John

Question #13225

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 answer is: b ($617)

Explanation:

The growth rate g=$45/$42-1.0=7,14%

Terminal value at Year 2 = free cash flow/(WACC-g)=45/(0.13 - 0,0714)=$768

Value of operations = -$20(1.13) ($42+$768)/(1.13)2 = $ 617

Explanation:

The growth rate g=$45/$42-1.0=7,14%

Terminal value at Year 2 = free cash flow/(WACC-g)=45/(0.13 - 0,0714)=$768

Value of operations = -$20(1.13) ($42+$768)/(1.13)2 = $ 617

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