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Acme Corp. is expected to generate a free cash flow (FCF) of $2,840.00 million this year (FCF₁ = $2,840.00 million), and the FCF is expected to grow at a rate of 25.00% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 3.90% per year, which will last forever (FCF₄). Assume the firm has no nonoperating assets. If Acme Corp.’s weighted average cost of capital (WACC) is 11.70%, what is the current total firm value of Acme Corp.? (Note: Round all intermediate calculations to two decimal places.)

a. $67,681.56 million
b. $8,571.82 million
c. $61,181.84 million
d. $50,984.87 million

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Answer:

d. $50,984.87 million

Explanation:

First, find the FCF per year;

FCF₁ = $2,840 million

FCF₂ = $2,840 (1.25) = $3,550mill

FCF₃ = $3,550 (1.25) = $4,437.5mill

FCF₄ = $4,437.5(1.0390) = $4,610.56mill

Find the PV of terminal value;( FCF₄ onwards)

PV FCF₄ onwards(at the t=3)  =[tex]\frac{4,610.56}{0.1170-0.039}[/tex]

PV FCF₄ onwards(at the t=3) = $59,109.74mill

Therefore, total FCF₃ = $4,437.5mill + $59,109.74mill = $63,547.24

Next, using a financial calculator, input the following with the "CF" key to find the NPV of these cashflows which is the total value of the firm;

CF0 = 0

C01 =2,840

C02 = 3,550

C03 = $63,547.24

then compute net present value; key in NPV CPT = $50,984.87 million