Question

Gonzales Corporation generated free cash flow of $88 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 10%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 12% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporation's expected terminal enterprise value in year 2

Answer 1

$1,384.24

Step-by-step explanation:

The computation of the expected terminal enterprise value in year 2 is shown below:

Terminal value in year 2= Free cash flows for the year 3 ÷ (Capitalization Rate - growth rate)

= $88 million × (1 + 10%) × (1 + 10%) × (1 + 4%) ÷ (12% - 4%)

= $110.7392 ÷ 8%

= $1,384.24

Hence, the expected terminal enterprise value in year 2 is $1,384.24

We simply applied the above formula so that the approximate value could arrive