ACCA Strategic Professional · Advanced Financial Management · Valuation and the use of free cash flows
Elmstead plc forecasts FCFF of $10 million in Year 1 and $11 million in Year 2. From Year 3 onward FCFF grows at 3% a year in perpetuity. WACC is 9%. What is the enterprise value today, to the nearest $0.1 million? (Year 3 FCFF = Year 2 x 1.03.)
The enterprise value is about $177.4 million, found by discounting Year 1 and Year 2 cash flows and a Year 2 terminal value of $188.8 million at 9%.
- A$169.3 millionCorrect
- B$157.6 million
- C$183.4 million
- D$172.4 million
Explanation
Year 3 FCFF = 11 x 1.03 = 11.33. Terminal value at end of Year 2 = 11.33 / 0.06 = 188.83. PV = 10/1.09 + (11 + 188.83)/1.1881 = 9.174 + 168.19 = 177.4? Recompute: 199.83/1.1881 = 168.19; total 177.4. Hence correct figure is $177.4 million, not listed.
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