Gonzales Corporation generated free cash flow of $ 85 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 8 %. 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 10 % and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporation's expected free cash flow in year 2?

Question

Business

Courtney Hudson

28 May, 05:29

Gonzales Corporation generated free cash flow of $ 85 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 8 %. 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 10 % and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporation's expected free cash flow in year 2?

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Carmelo · Answer 1

Free cash flow in year 2 is $ 99.14 million

Explanation:

Year one free cash flow=free cash flow in the current year * (1+growth rate)

free cash flow in the current year is $85 million

free cash flow growth rate is 8%

year one free cash flow=$85 million * (1+8%)

=$85 million * 1.08=91.8 million

year two free cash flow=year one free cash flow * (1+growth rate)

year one free cash flow $91.8 million

free cash flow growth rate remains at 8%

year two free cash flow=$91.8 million * (1+8%) = $91.8 million * 1.08=$99.14 million

The free cash flow in year for Gonzales corporation is computed as $ 99.14 million

Alternatively

free cash flow in year two=$85 million * (1+8%) ^2 = $ 99.14 million