Bronson Building Products Inc estimates that FCFF in the coming year w

Bronson Building Products Inc estimates that FCFF in the coming year will be $1,600,000, year two will be 15% greater than year one, and year three will be 10% greater than year two. Bronson has a cost of capital of 12%.

Estimate the firm’s terminal value FCFF as of year three if cash flows are estimated to continue to increase at a rate of 5% indefinitely. What is the overall estimated (present) value of the firm?

ANSWER

FCFF1 = $1,600,000 PV FCFF1 = $1,428,571
FCFF2 = $1,600,000 * (1.15 ) = $1,840,000 PV FCFF2 = $1,466,837
FCFF3 = $1,840,000 * (1.10 ) = $2,024,000 PV FCFF3 = $1,440,643
Terminal Value at year 3 = $2,024,000 * (1.05 )/(.12 – .05 ) = $30,360,000 PV of TM = $21,609,648
Present value of the firm = $25,945,700