Brushy Mountain Mining Company's coal reserves are being depleted, so its sales are falling

Finance Aug 09, 2020

Brushy Mountain Mining Company's coal reserves are being depleted, so its sales are falling. Also, environmental costs increase each year, so its costs are rising. As a result, the company's free cash flows are declining at the constant rate of 3% per year. If its current free cash flow (FCF0) is $2 million and its weighted average cost of capital (WACC) is 11%, what is the estimated value of Brushy Mountain's value of operations?

Expert Solution

Computation of the estimated value of operations:-

Value of operations = FCF1 / (WACC - Growth rate)

= $2 * (1 - 3%) / (11% - (- 3%))

= $1.94 / 14%

= $13.86 million

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