Wavington Enterprises is headquartered in an emerging market nation that is expected to have 27 percent inflation over the next year. Charleston Johnson expects the local government to be successful in bringing inflation under control, and anticipates that it will fall to 20 percent in the second year and 10 percent in the third year, where he expects inflation to stabilize. Johnson predicts that by year 3, Wavington will have nominal free cash flow of $187 million growing at 4 percent annually in real terms. In view of his optimistic outlook, he is considering an investment in Wavington, and has calculated the real WACC for Wavington at 8 percent. The nominal continuing value of Wavington in year 3 is closest to: A) $4,250. B) $4,675. C) $5,348. D) $4,862.
Nominal Growth = 1.04*1.1 = 14.4% Nominal WACC = 1.08*1.1 = 18.8% CV = 187(1.144)/(.188-.144) = $4,862 D
I’m I way off with B then? P/e = 1/ (0.08 - 0.4*0.1) = 25. 187*25 = 4675
Yeah I think I’m wrong… so much to review
Nibs is right- no hesitation, nice job! i got it but it took me a while… Your answer: D was correct! The nominal growth rate for Wavington in the steady state is (1.10 × 1.04) – 1 =) 14.4%. The nominal WACC in the steady state is (1.10 × 1.08) – 1 =) 18.8%. The nominal continuing value for Wavington in year 3 is: nominal continuing value = FCF3 × (1 + nominal growth rate) / (nominal WACC – nominal growth rate) nominal continuing value = 187 × (1.144) / (0.188 – 0.144) nominal continuing value = 213.9 / (0.044) = 4,862
Nice, the number for each wrong turn is there… I just got it wrong again even knowing the answer!
Cant we do by this method 187 + 4% / 8-4 194.48/ 0.04 = 4862
it seems like it shouldn’t matter whether we calculate in nominal or real terms.
it does, cause the numerator wouldn’t grow by as much, the current numerator is nominal free cash flow, if you had real free cash flow the the real #'s would yeild the same results.