#617 Brooks Enterprises has never paid a dividend

Brooks Enterprises has never paid a dividend - Business Statistics

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Free Chegg Question

Brooks Enterprises has never paid a dividend. Free Cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 8%. The company's weighted average cost of capital is 12%.

What is the terminal, or horizon value of operations, find the value of all free cash flows beyond year 2 discounted back to year 2.

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Free Chegg Answer 1

value of operation when FCF is expected to grow at 7% rate
Terminal value = Vn = FCF2(1+g)/WACC - g

V2=$100,000(1+.08)/.12-.08

V2 = $2,700,000

Value of operation = Vo = PV of expected future free cash flow
Vo = FCF1/(1+WACC)^1 + FCF2/(1+WACC)^2 + terminal value/(1+WACC)^2

V0 = $80,000/(1+.12)^1 + $100,000/(1+.12)^2 + $2,700,000/(1+.12)^2

V0 = $71,428.57 + $79,719.39 + $2,152,423.47 = $2,303,571.43