etty Corporation forecasts a negative free cash flow for the

etty Corporation forecasts a negative free cash flow for the coming year, with FCF_1 = -$10 million, but it expects positive numbers thereafter, with FCF_2 = $28 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm\'s total corporate value, in millions? Your answer should be between 42.68 and 352.15, rounded to 2 decimal places, with no special characters.

Solution

FCF 1= -10
FCF 2 = 28
FCF 3 = 28 *(1+ growth) = 28 * ( 1 + 4%) = 29.12
The terminal value of constant growth calculated for year 2 = FCF3/(WACC - Growth) = 29.12/(14% - 4%) = 291.2

Total Corporate Value = FCF1/(1+WACC) +   FCF1/(1+WACC)² + Terminal value/(1+WACC)³ =
-10/1.14 + 28/1.14² + 291.2/1.14² = 236.84

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