How Much is the Company's Enterprise Value Based on Free Cash Flow Growth?
What is the company's free cash flow for the current year?
$4,580,000
What do investors believe about the company's free cash flow growth?
Investors believe that the company's free cash flow will grow by 4% annually forever.
What is the company's weighted average cost of capital?
12%
What is the enterprise value options?
a. $67,500,000
b. $56,780,000
c. $59,540,000
d. $85,350,000
Answer:
The enterprise value of the company, calculated using the Gordon Growth Model with a free cash flow of $4,580,000 growing at 4% annually and a WACC of 12%, is approximately $57,250,000. The closest provided option is b. $56,780,000.
To determine a company's enterprise value based on its free cash flow growth, we can use the Gordon Growth Model (also known as a perpetuity growth model). The Gordon Growth Model takes the current year's free cash flow and grows it indefinitely at a steady rate, then discounts it by the weighted average cost of capital (WACC).
Given that the free cash flow for the current year is $4,580,000 and is expected to grow at 4% annually forever, and the WACC is 12%, we would use the following formula:
Enterprise Value = Free Cash Flow / (WACC - Growth Rate)
So the calculation would be:
Enterprise Value = $4,580,000 / (0.12 - 0.04)
Enterprise Value = $4,580,000 / 0.08
Enterprise Value = $57,250,000
Therefore, the closest answer from the provided options would be b. $56,780,000.