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Homework answers / question archive / you are using DCF to value a firm
you are using DCF to value a firm. next year you predict free cash flows of 1 million dollars. the second year free cash flows are estimated at 1.3 million. the next year after that you feel free cash flows will grow forever at 3%. if you have a discount rate of 3%, what is the value of this firm?
Computation of Value of Firm:
Value of Firm = Free Cash Flow for Year 1 * 1/(1+Discount rate)^1 + Free Cash Flow for Year 2 * 1/(1+Discount rate)^2 + Terminal Cash Flow for Year 2 * 1/(1+Discount rate)^2
= Free Cash Flow for Year 1 * 1/(1+Discount rate)^1 + Free Cash Flow for Year 2 * 1/(1+Discount rate)^2 + Cash Flow for Year 2*(1+Growth rate)/(Discount Rate - Growth Rate) * 1/(1+Discount rate)^2
= $1,000,000*1/(1+3%)^1 + $1,300,000*1/(1+3%)^2 + $1300000*(1+3%)/(3%-3%)*1/(1+3%)^2
= $970,873.79 + $1,225,374.68 + 0
Value of Firm = $2,196,248.47
