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Horizon Value of Free Cash Flows Current and projected free cash flows for Radell Global Operations are shown below
Horizon Value of Free Cash Flows
Current and projected free cash flows for Radell Global Operations are shown below.
Actual
2018
2019Projected
2020
2021Free cash flow$604.38$665.06$705.11$747.42(millions of dollars)
Growth is expected to be constant after 2020, and the weighted average cost of capital is 11.5%. What is the horizon (continuing) value at 2021 if growth from 2020 remains constant? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to the nearest whole number.
$ million
Expert Solution
So, horizon (continuing) value at 2021 is $14,404.82
Explanation
Computation of Horizon Value:
Horizon Value = Free Cash Flow Year 2021*(1+Growth Rate)/(WACC - Growth Rate)
Here,
Free Cash Flow Year 2021 = $747.42 millions
Growth Rate = (Free Cash Flow Year 2021/Free Cash Flow Year 2020) - 1 = ($747.42/$705.11)-1 = 6.00%
WACC or Weighted Average Cost of Capital = 11.5%
Horizon Value = $747.42*(1+6%)/(11.5% - 6%) = $14,404.82 millions
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