Which of the following represents the present value of a terminal period FCFF if r_w is the weighted average cost of capital? A) (FCFF_t+1/ (r_w-g)) / (1+r_w)^t B) (FCFF_t+1/ (g- r_w)) / (1+r_w)^t C) (FCFF_t/ (r_w-g)) / (1+g)^t D) (FCFF_t/ (g- r_w)) / (1+g)^t

Question

Quizplus · Accepted Answer

The present value of a terminal period Free Cash Flow to the Firm (FCFF) is calculated using the formula: $ \frac{FCFF_{t+1}}{WACC - g} $, where $FCFF_{t+1}$ is the free cash flow to the firm in the next period, $WACC$ is the weighted average cost of capital, and $g$ is the growth rate. The correct formula, adjusted for present value, is represented in option A, where the FCFF is discounted back to the present value using the $WACC$.

Which of the Following Represents the Present Value of a Terminal