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2 September, 03:17

Brook Corporation's free cash flow for the current year (FCF0) was $3.00 million. Its investors require a 13% rate of return on (WACC 5 13%). What is the estimated value of operations if investors expect FCF to grow at a constant annual rate of (1) - 5%, (2) 0%, (3) 5%, or (4) 10%?

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  1. 2 September, 06:06
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    The correct answer for option (1). is 15.83 million, option (2) is 23.08 million, option (3) is 45 million and option (4) is 101 million.

    Explanation:

    According to the scenario, the given data are as follows:

    WACC = 13%

    FCFO = 3 million

    So, we can calculate the value of operation by using following formula:

    Value of operation = FCFO * (1 + R) : (WACC - R)

    (1). Here R = - 5%

    So, by putting the value in the formula, we get

    Value of operation = 3 * (1 - 0.05) : (0.13 + 0.05)

    = 15.83 million

    (2). Here R = 0%

    So, by putting the value in the formula, we get

    Value of operation = 3 * (1 + 0) : (0.13 - 0)

    = 23.08 million

    (3). Here R = 5%

    So, by putting the value in the formula, we get

    Value of operation = 3 * (1 + 0.05) : (0.13 - 0.05)

    = 45 million

    (4). Here R = 10%

    So, by putting the value in the formula, we get

    Value of operation = 3 * (1 + 0.1) : (0.13 - 0.1)

    = 101 million
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