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Gupta Corporation is undergoing a restructuring, and its free cash flows are expected to vary considerably during the next few years. However, the FCF is expected to be $85.00 million in Year 5, and the FCF growth rate is expected to be a constant 6.5% beyond that point. The weighted average cost of capital is 12.0%. What is the horizon (or continuing) value (in millions) at t

Respuesta :

Answer:

$1,646 million

Explanation:

The computation of the horizon (or continuing) value is shown below:

Continuing value = (Free cash flow for year 5  × Growth rate) ÷ (cost of capital - growth rate)

where,  

Free cash flow for year 5 is $85 million

The growth rate is 6.5%

Cost of capital is 12%

So by placing these values the  horizon (or continuing) value  

= ($85 million × 1.065) ÷ (0.12-0.065)

= $1,646 million

We simply applied the above formula

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