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Free cash flow valuation

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Free cash flow valuation

You are evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating ?$42,800 of free cash flow ?(FCF0?= $42,800?). On the basis of a review of? similar-risk investment? opportunites, you must earn? a(n) 17?% rate of return on the proposed purchase. Because you are relatively uncertain about future cash? flows, you decide to estimate the? firm's value using several possible assumptions about the growth rate of cash flows.

a. What is the? firm's value if cash flows are expected to grow at an annual rate of? 0% from now to? infinity?

b. What is the? firm's value if cash flows are expected to grow at a constant annual rate of 8?% from now to? infinity?

c. What is the? firm's value if cash flows are expected to grow at an annual rate of 12?% for the first 2? years, followed by a constant annual rate of 8?% from year 3 to? infinity?

Reference no: EM132465539

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