Gonzales Corporation generated free cash flow of $88 million this year. For the next two years, the companyʹs free cash flow is expected to grow at a rate of 10%. After that time, the companyʹsfree cash flow is expected to level off to the industry long-term growth rate of 4% per year. Ifthe 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 Corporationʹsexpected terminal enterprise value in year 2?

A) $1384.24

B) $1245.82

C) $1107.39

D) $968.97

Question

Business

Adan Mercer

5 April, 10:02

Gonzales Corporation generated free cash flow of $88 million this year. For the next two years, the companyʹs free cash flow is expected to grow at a rate of 10%. After that time, the companyʹsfree cash flow is expected to level off to the industry long-term growth rate of 4% per year. Ifthe 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 Corporationʹsexpected terminal enterprise value in year 2?

A) $1384.24

B) $1245.82

C) $1107.39

D) $968.97

+1

Answers (1)

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Pacheco · Answer 1

A) $1384.24

Explanation:

Terminal Value = Free Cash Flow (FCF) of last forecast * (1 + perpetual growth rate) / (discount rate - perpetual growth rate)

FCF of last forecast = $88 * (1+10%) ^2 = $106.48

Gonzales Corporationʹs expected terminal enterprise value in year 2 = $106.48 * (1+4%) / (12%-4%) = $1382.24