Compute the value of a firm with free cash flows of $1000,$2500,and $3000 over the next three years,a terminal firm value of $40,000 after three years,and the unlevered cost of capital is 15%.Assume that the interest rate tax shield is zero.
A)$26,191
B)$27,234
C)$31,033
D)$39,343
E)$44,926

Question

Quizplus · Accepted Answer

To calculate the present value of the firm, we need to find the present value of the free cash flows for the next three years and the present value of the terminal firm value. We can use the formula:

PV = FCF1/(1+r)^1 + FCF2/(1+r)^2 + FCF3/(1+r)^3 + Terminal Value/(1+r)^3

where, 
FCF1 = $1000 
FCF2 = $2500 
FCF3 = $3000 
Terminal Value = $40,000 
r = 15%

Substituting the values, we get:

PV = $1000/(1+0.15)^1 + $2500/(1+0.15)^2 + $3000/(1+0.15)^3 + $40,000/(1+0.15)^3 
PV = $867.25 + $1800.27 + $2049.56 + $20,315.87 
PV = $31,033

Therefore, the value of the firm is $31,033. Option C is the correct answer.

Compute the Value of a Firm with Free Cash Flows