ACCA Strategic Professional · Advanced Financial Management · Valuation and the use of free cash flows
Carvel plc expects free cash flow to the firm (FCFF) of $12.0 million next year, growing at 4% a year indefinitely. Its WACC is 10%. Using the constant-growth model, what is the value of the firm's operations (enterprise value)?
The enterprise value is $200 million. Next year's free cash flow of $12 million is divided by the difference between the 10% WACC and 4% growth, which is 6%, giving 12 divided by 0.06.
- A$120.0 million
- B$200.0 millionCorrect
- C$208.0 million
- D$130.0 million
Explanation
Enterprise value = FCFF1 / (WACC - g) = 12.0 / (0.10 - 0.04) = $200.0 million. Option $120.0m ignores growth and divides by WACC only. Option $208.0m wrongly grows the cash flow again (12 x 1.04 / 0.06) although it is already next year's figure.
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