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Horizon Value of Free Cash Flows Current and projected free cash flows for Radell Global Operations...

Question

Horizon Value of Free Cash Flows Current and projected free cash flows for Radell Global Operations...

Horizon Value of Free Cash Flows
Current and projected free cash flows for Radell Global Operations are shown below.

                      Actual 2016   2017 Projected   2018         2019
Free cash flow   $606.82 $677.50 $794.39 $850.00
(millions of dollars)           

Growth is expected to be constant after 2020, and the weighted average cost of capital is 12%. What is the horizon (continuing) value at 2021 if growth from 2020 remains constant? Round your answer to the nearest dollar

Answers

First, calculate the growth rate
Year Year Cash flow
2016 1 $              607
2017 2 $              678
2018 3 $              794
2019 4 $              850
Growth in 2019 (850-794.39)/794.39
Growth in 2019 7.00%
Now let's calculate the future expected cash earnings with assumed same growth rate as in 2019.
Year Year Cash flow Cash flow
2020 1 850*107% $    909.50
2021 2 909.50*107% $    973.17
Current Cash flow $      973.17
Rate of return 12.00%
Growth Rate 7.00%
Horizon value at the end of 2021 =Current Cash flow*(1+Growth rate)/(Rate of return-Growth Rate)
Horizon value at the end of 2021 '973.17*(1+7.00%)/(12%-7.00%)
Horizon value at the end of 2021 $20,827.21


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