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The Widget Company forecast free cash flow for the next five years is as follows:
2020 2021 2022 2023 2024
Free cash flows 2,131 2,301 2,463 2,706 2,818
Ms. Stephanie Olsen, CFO reports that the weighted average cost of capital of the company is 13% and that the expected growth rate after 2024 is 4% per year. Given these numbers and assumptions:
a. Calculate the horizon value as of 2024.
b. Calculate the value of Widget as of today.
c. Recalculate the value assuming a cost of capital of 13% and a growth rate of 6%. What effect does increasing or decreasing the growth rate have on value?
d. Recalculate the value assuming a cost of capital of 15% and a growth rate of 4%. What effect does increasing or decreasing the cost of capital have on value?
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