Discounted cash flows

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Company valuation (DCF) Exercises with solutions Accounting, Finance & Control Accounting, Finance & Control 2016-2017 2 1 Terminal value The company Alabama has an estimation of its FCFF and FCFE for 2014. In particular, its FCFF for 2014 will be 20 while its FCFE for 2014 will be 15. The company is now interested in computing also its Terminal Value in different scenarios: 1. The FCFF will remain constant over years and equal to the one of 2014. 2. The FCFF will grow at a rate of 2% for each year, starting from 2015. 3. The FCFF will remain constant for next 10 years. After this period, the FCFF will be null. 4. The FCFF will grow at a rate of 2% for each one of next 10 years. After this period, the FCFF will be null. 5. The FCFE will remain constant over years and equal to the one of 2014. 6. The FCFE will grow at a rate of 3% for each year, starting from 2015. 7. The FCFE will remain constant for next 7 years. After this period, the FCFE will be null. 8. The FCFE will grow at a rate of 3% for each one of next 7 years. After this period, the FCFE will be null. Assuming an equity cost of capital of 10% and a WACC of 8%, estimate the TV of the company in each of the previous situations. 1.1 Solution 1. TV=$%$$&'%%=()*%=250 2. TV=$%$$×(123)&'%%53=()×1.)(*%5(%=340 3. TV=$%$$&'%%×1−1(12&'%%);=()*%×1−11.)*<==134.2 4. TV=$%$$×(123)&'%%53×1−(123);(12&'%%);=()×1.)(*%5(%×1−1.)(<=1.)*<==148.0 5. TV=$%$?@A=1B1)%=150 6. TV=$%$?×123@A53=1B×1.)C1)%5C%=220.7 7. TV=$%$?@A×1−112@A;=1B1)%×1−11.1)E=73.0 8. TV=$%$?×(123)@A53×1−(123);(12@A);=1B×1.)C1)%5C%×1−1.)CE1.1)E=81.4 Accounting, Finance & Control 2016-2017 3 2 Company valuation Table 1 shows the estimated FCFF and FCFE of Gamma in years n+1 and n+2. In years n+1 and n+2 the estimated WACC of Gamma is 10%. Unfortunately, you are not…