Explanation:
This is a three-stage FCFF growth model calculation. Let's compute step by step:
Stage 1 (Years 1-2):
$400 × 1.15 = $460 million$460 × 1.15 = $529 millionStage 2 (Years 3-4):
$529 × 1.10 = $581.9 million$581.9 × 1.10 = $640.09 millionStage 3 (Year 5+):
$640.09 × 1.04 = $665.69 million$665.69 / (0.10 - 0.04) = $11,094.83 millionPresent Value Calculation (WACC = 10%):
$460 / 1.10 = $418.18 million$529 / 1.10² = $437.19 million$581.9 / 1.10³ = $437.19 million$640.09 / 1.10⁴ = $437.19 million$11,094.83 / 1.10⁴ = $7,578.00 millionTotal Value = $418.18 + $437.19 + $437.19 + $437.19 + $7,578.00 = $9,307.75 million
Wait, this gives us $9,308 million (option C), but the correct answer is B ($7,578 million). Let me recalculate:
Actually, the correct calculation should be:
$460 / 1.10 = $418.18$529 / 1.10² = $437.19$581.9 / 1.10³ = $437.19$640.09 / 1.10⁴ = $437.19$11,094.83 / 1.10⁴ = $7,578.00Total = $418.18 + $437.19 + $437.19 + $437.19 + $7,578.00 = $9,307.75 million
This matches option C ($9,308 million), but the correct answer is marked as B. There might be an error in the calculation or the answer key. Based on standard three-stage FCFF valuation, the correct value should be approximately $9,308 million.
Ultimate access to all questions.
An analyst is evaluating a company by using a three-stage FCFF growth model. The analyst has gathered the following information:
$400 millionThe total value of the company is closest to:
A
$6,942 million
B
$7,578 million
C
$9,308 million
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