The question is really too long to post, but can a Schweser user take a look at the last question of this vignette and tell me what I’m doing wrong. My issue is below. Years: 2005…2006…2007…2008 FCF: …13…16…21…23… Cost of capital is 18% The terminal year value in 2008 is given in the problem as 223.7 Year 2005 is year 1. so I npv’d it as, (13/1.18)+(16/1.18^2)+(21/1.18^3)+(223.7/1.18^3) Schweser’s answer: Firm value = ($13 / 1.18^1) + ($16 / 1.18^2) + ($21 / 1.18^3) + ($23 / 1.18^4) + ($223.7 / 1.18^4) What did I do wrong? Did I miss something in the vignette? T/G
You calculate the terminal value with the 2008 FCF compounded by the growth rate which made it the 2009 FCF. Using the GGM model, cash flow*(1+g)/r-g brings it back to 2008. You still have to add the FCF that was earned in 08 which you forgot.
That’s it. I need a break, that’s too easy a concept to miss. Thanks - T/G
I’m just about done myself. I tried to do as much as I can during the day so I don’t have to do anything tonight.