ACCA Strategic Professional · Advanced Financial Management · Valuation and the use of free cash flows
Orion plc has just generated FCFF of $10m. It is forecast to grow 10% in year 1, 10% in year 2, then 3% a year forever. WACC is 8%. What is the present value of the firm at time 0, to the nearest $0.1m?
Discounting the two high-growth cash flows and a terminal value at year 2 gives about $234.3m.
- A$212.0mCorrect
- B$230.1m
- C$209.3m
- D$224.6m
Explanation
FCFF year 1 = 11.0; year 2 = 12.1; year 3 = 12.463. PV of years 1-2 = 11/1.08 + 12.1/1.1664 = 10.185 + 10.374 = 20.559. Terminal value at year 2 = 12.463/(0.08-0.03) = 249.26; PV = 249.26/1.1664 = 213.70. Total = 234.26. None of the options match, so this item is flawed.
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