You are using the FCFF approach to value a business. The estimated FCFF for next year will be $13.6 million, and it will increase at a rate of 6 percent for each of the following five years. After that point, the FCFF will increase at a rate of 3 percent forever. If the WACC for this firm is 8 percent, what is it worth? (Round final answer to the nearest million.)
A) $301 million
B) $354 million
C) $241 million
D) $144 million

Question

Quizplus · Accepted Answer

The correct answer is A because the FCFF approach to valuing a business involves discounting the future cash flows back to the present at the WACC. The FCFF for next year is $13.6 million, and it will increase at a rate of 6 percent for each of the following five years. After that point, the FCFF will increase at a rate of 3 percent forever. The WACC for this firm is 8 percent. So, the value of the business is $301 million.

You Are Using the FCFF Approach to Value a Business