Question

Suppose a company's most recent free cash flow (ie., FCF) was $100 million and is expected to grow at a constant rate of 5 percent. If the company's weighted average cost of capital is 15 percent, what is the current value from operations?

a. $950 million
b. $1,250 million
c. $1,050 million
d. $913 million
e. $1.500 million

Answer 1

The current value from operations is $1,000 million.

Step-by-step explanation:

To calculate the current value from operations, we need to use the formula for the present value of a growing perpetuity:

Present Value (PV) = Free Cash Flow (FCF) / (Weighted Average Cost of Capital (WACC) - Growth Rate)

Plugging in the given values, the calculation would be:

PV = $100 million / (0.15 - 0.05) = $1,000 million

Therefore, the current value from operations is $1,000 million, which is option b.