Question

Mooradian Corporation's free cash flow during the just-ended year (t = 0) was $150 million, and its FCF is expected to grow at a constant rate of 5.0% in the future. If the weighted average cost of capital is 12.5%, what is the firm's total corporate value, in millions? a. $2,205 b. $1,895 c. $2,315 d. $1,995 e. $2,100

Answer 1

e. $2,100

Step-by-step explanation:

The computation of the firm's total corporate value is shown below:

= Free cash flow × (1 + growth rate) ÷ (weighted average cost of capital - growth rate)

= $150 million × (1 + 0.05) ÷ (12.5% - 5%)

= $157.50 million ÷ 7.5%

= $2,100 million

We consider all the items which are given in the question.

We simply calculate the free cash flow after considering the growth rate an then divide it by taking the difference of rate.