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Analysts provide the following estimates for free cash flows for Pizza Palace: (USD Millions) 2021 2022 Free cash flow 9
Analysts provide the following estimates for free cash flows for Pizza Palace: (USD Millions) 2021 2022 Free cash flow 9.9 15.0 After 2022, free cash flows are expected to grow at a constant rate of 4% per year, forever. You estimate the discount rate for Pizza Palace to be 10%. Calculate the intrinsic firm (enterprise) value for Pizza Palace. O 176.3 236.3 202.0 140.3 O 300.0
Expert Solution
Terminal value at end of 2022=2023 FCF/(discount rate-growth rate)
2023 FCF=2022 FCF*(1+growth rate)=15*(1+4%)=15.6 million
Terminal value at end of 2022=15.6/(10%-4%)=260 million
Enterprise value=(2021 FCF/(1+10%))+(2022 FCF+Terminal value at 2022)/(1+10%)^2)
=(9.9/1.1)+((15+260)/1.1^2)
=9+227.3
=236.3 million
Option II is correct
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