Chapter 13
1. Suppose Leonard, Nixon, & Shull Corporation’s projected free cash flow for next year is
$100,000, and FCF is expected to grow at a constant rate of 6%. If the company’s weighted
average cost of capital is 11%, what is the value of its operations?
a. $1,714,750
b. $1,805,000
c. $1,900,000
d. $2,000,000
FCF*(1+ growth rate)/(WACC – growth rate) , CF / (1+WACC)^t, t – time period
100000 (1+0.06)/(.11-0.06) = 2120000, CFs = $90090.09 + 1909909.91 =
2000000
e. $2,100,000
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
1
(50.00)
(45.05)
2.
100.00
81.16
3
1750.00
1420.34
Net Present Values
1456.46
b. $1,529
c. $1,606
d. $1,686
e. $1,770