Compute the value of a firm with free cash flows of $4000,$4500,and $5000 over the next three years,a terminal firm value of $60,000 after three years,and the unlevered cost of capital is 10%.Assume that the interest rate tax shield is zero.
A)$56,191
B)$57,234
C)$58,098
D)$59,123
E)$61,431

Question

Quizplus · Accepted Answer

To calculate the value of the firm, we use the discounted cash flow (DCF) method. The formula for DCF is the sum of the present value of future cash flows and the present value of the terminal value, discounted back at the unlevered cost of capital. Given the unlevered cost of capital is 10%, we calculate as follows:Year 1 cash flow: $4000 / (1 + 0.10)^1 = $3636.36Year 2 cash flow: $4500 / (1 + 0.10)^2 = $3726.45Year 3 cash flow: $5000 / (1 + 0.10)^3 = $3756.89Terminal value: $60000 / (1 + 0.10)^3 = $45071.31Adding these values together gives us the total value of the firm:$3636.36 + $3726.45 + $3756.89 + $45071.31 = $56191.01Rounded to the nearest whole number, the value of the firm is approximately $56,191.

Compute the Value of a Firm with Free Cash Flows