You are performing a valuation of a retail firm based on free cash flow to the firm (FCFF). You want to buy the firm, own it for 8 years and then sell it. FCFF in the most recent 12 months (year 0) was K3.65 million. You expect cash flows to grow at an annual rate of 4% for the next five years and then settle at the year 5 level per year for the remaining 3 years. The firm's cost of equity is 10% and its weighted average cost of capital is 8%. What price should you pay for this firm based on the discounted value of FCFF? Explain your answer.

You are performing a valuation of a retail firm based on free cash flow to the firm (FCFF). You want to buy the firm, own it for 8 years and then sell it. FCFF in the most recent 12 months (year 0) was K3.65 million. You expect cash flows to grow at an annual rate of 4% for the next five years and then settle at the year 5 level per year for the remaining 3 years. The firm's cost of equity is 10% and its weighted average cost of capital is 8%. What price should you pay for this firm based on the discounted value of FCFF? Explain your answer.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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