Brook Corporation’s free cash flow for the current year (FCF0) was $3.00 million. Its investors require a 13% rate of return on (WACC 5 13%). What is the estimated value of operations if investors expect FCF to grow at a constant annual rate of (1) −5%, (2) 0%, (3) 5%, or (4) 10%?

The correct answer for option (1). is 15.83 million, option (2) is 23.08 million, option (3) is 45 million and option (4) is 101 million.

Explanation:

According to the scenario, the given data are as follows:

WACC = 13%

FCFO = 3 million

So, we can calculate the value of operation by using following formula:

Value of operation = FCFO × (1 + R) ÷ (WACC - R)

(1). Here R = -5%

So, by putting the value in the formula, we get

Value of operation = 3 × ( 1 - 0.05) ÷ (0.13 + 0.05)

= 15.83 million

(2). Here R = 0%

So, by putting the value in the formula, we get

Value of operation = 3 × ( 1 + 0) ÷ (0.13 - 0)

= 23.08 million

(3). Here R = 5%

So, by putting the value in the formula, we get

Value of operation = 3 × ( 1 + 0.05) ÷ (0.13 - 0.05)

= 45 million

(4). Here R = 10%

So, by putting the value in the formula, we get

Value of operation = 3 × ( 1 + 0.1) ÷ (0.13 - 0.1)

= 101 million

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