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Hi , I am looking answer for those questions: Canton Corporation anticipates that it will earn firm FCFs of $4 million per year for each of the next...

Hi , I am looking answer for those questions:

Q1: Canton Corporation anticipates that it will earn firm FCFs of $4 million per year for each of the next five years. Beginning in year 6, the firm will earn FCF of $5 million per year for the indefinite future. If Canton's cost of capital is 12%, what is the value of the firm's future cash flows?

Q2: You have worked in Canton Corporation for the last five years and have a more optimistic view of the firm's future FCFs. In your personal/professional opinion, Canton could generate $4 million FCF next year, $4.5 million in year two, $5 million in year three, $5.5 million in year four, $6 million in year five, and then maintain a FCF of $ 6.8 million for the indefinite future. If your estimates were correct, what is the value of the firm's future cash flows at 12% cost of capital?

Q3: Your colleague Sam disagree with you. She feels the FCFs should be modeled with a two-stage growth rate. During the first five years, Sam estimates the growth rate of FCF should be 8% per year starting at $4 million in year 1. Starting year 6, Canton's FCF will grow at 2% per year for the indefinite future. Given 12% cost of capital, what is the value of the firm's future cash flows under this set of assumptions? 

Thanks!!!!

Top Answer

Question 1: Value of firm = 4 million x (1-1.12 -5 ) / 0.12 + 5 million /0.12 x 1.12 -5 = 38.06 million Question 2: Value of... View the full answer

5 comments
  • for the question 3 the correct answer is =Value of firm = 4 million x 1.08/1.12 + 4 million x 1.082/1.122+4 million x 1.083/1.123+4 million x 1.084/1.124+4 million x 1.085/1.125+4 million x 1.085 x 1.02/0.1/1.125 =51.97
    • umerchana
    • May 08, 2018 at 12:03pm
  • I hope you find this helpful.
    • umerchana
    • May 08, 2018 at 12:04pm
  • Thank you so much!!!!
    • Elishanyanjo
    • May 08, 2018 at 12:11pm
  • you are welcomed
    • umerchana
    • May 08, 2018 at 12:12pm
  • please i have a question , when l calculated Q2 kthe answer it's 49.77 million not 55.95 million , l don't know why, are you sure of your answer? sorry to ask, just to make sure if l am doing a mistake.Thanks
    • Elishanyanjo
    • May 08, 2018 at 12:45pm

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