Suppose a company’s most recent free cash flow (i.e., FCF0) was $100 million and is expected to grow at a constant rate of 5 percent. If the company’s weighted average cost of capital is 15 percent, what is the current value from operations?

Suppose a company’s most recent free cash flow (i.e., FCF0) was $100 million and is expected to grow at a constant rate of 5 percent. If the company’s weighted average cost of capital is 15 percent, what is the current value from operations?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter2: Financial Statements, Cash Flow, And Taxes

Section2.8: Performance Evaluation

Problem 1ST

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Question

Suppose a company’s most recent free cash flow (i.e., FCF₀)
was $100 million and is expected to grow at a constant rate of 5
percent. If the company’s weighted average cost of capital is 15
percent, what is the current value from operations?

Definition Definition Cash that is left over after a company has paid for its operating and capital expenses. Unlike net income or earnings, free cash flow excludes non-cash expenses of the income statement and includes the expenditures on equipment and assets. Free cash flow also helps potential shareholders to evaluate how quickly the company can pay interest and dividends.

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