Calculate the total value of Smart Company today

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Reference no: EM132977595

Question - Smart Company is a new venture which makes productivity and workflow improvement apps for technology companies and helps them drastically cut down their operational costs by streamlining processes.

Given that its products are in beta stage and not yet commercialized the smart company does not expect to generate any free cash flows in Year 1, Year 2 and Year 3. Further, it is expected to generate free cash flows of US$ 5Mn and US$ 1Mn in Year 4 and Year 5, respectively. Cash flows are expected to be 20 million dollars in years six then expected to grow at 6% annual rate thereafter.

The discount rate for years 1 to 5 is 50% as the startup is in a high-risk stage, whereas the discount rate for the perpetual?growth period starting period starting year 6 is 25%.

Required -

1. Determine the present value of Free Cash Flow forecasted in the explicit growth period.

2. Calculate the terminal or horizon value of Smart Company in Year 5.

3. Calculate the total value of Smart Company today.

Reference no: EM132977595

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