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Gere Furniture forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter. If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3?a. $840b. $882c. $926d. $972e. $1,021

Respuesta :

Answer:

Option (A) is correct

Explanation:

Given that,

Free cash flow in Year 3, FCF3 = $40 million

FCF to grow at a constant rate, g = 5%

Weighted average cost of capital, WACC = 10%

Cost of equity = 15%

Therefore,

Horizon Value at year, t = 3:

[tex]=\frac{FCF4}{(WACC-g)}[/tex]

[tex]=\frac{FCF3(1+g)}{(WACC-g)}[/tex]

[tex]=\frac{40(1+0.05)}{(0.10-0.05)}[/tex]

[tex]=\frac{42}{0.05}[/tex]

     = $ 840

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