This is a question i heard from my friend on Corp Fin topic( Schweser question)
Gambit Enterprises is being evaluated as an acquisition target. An analyst believes that the firm will have free cash flow (FCF) of $500m during year 5, after which the growth rate in FCF is expected to be 4% indefinitely. The weighted average cost of capital (WACC) for Gambit is 10%. What is the estimated value of the firm at the end of year 5?
Value at end of year 5 = (FCF year 5 × (1 + g)) / (WACC – g) Value at end of year 5 = (500 × 1.04) / (0.10 – 0.04) = $8667m
Why is the 5th year FCF of 500 not added to the “estimated value of the firm at end of year 5” Isn’t it true that what ever a company earns in that particular year ( beginning, middle or at the end) all treated as Cash flows at the end of the year ?
This was a total shocker to me as to why the $500M was not added.
Thank you for your response in advance.