Question

The Deamon Seed, a chain of Garden Supply Stores had a free cash flow for FY 2021 of $5,250 (all amounts are in $000). Stephen Kelley, CEO, has developed a four year free cash projection, along with estimated cost of capital during the 4 year period, and terminal growth and cost of capital projections. -- a copy of which has been reproduced in the table below. From the end of FY2022-FY2023 FY2024-FY2025 FY2025 to Growth Rate 3.2% Cost of Capital 4.25% 2.5% 5.20% perpetuity 1.2% 4.80% Considering this forecast he asked his CFO (you) to determine the company's valuation using the NPV (net present value) method. Choose the best answer from the list of options below. For this question consider FY2022 as Year 1 and FY2025 as Year 4. (NOTE THAT EXCEL WAS USED TO CALCULATE THE ANSWER TO THIS PROBLEM)

          The Deamon Seed, a chain of Garden Supply Stores had a free cash
flow for FY 2021 of $5,250 (all amounts are in $000). Stephen Kelley,
CEO, has developed a four year free cash projection, along with
estimated cost of capital during the 4 year period, and terminal growth and
cost of capital projections. -- a copy of which has been reproduced in the
table below.
From the end of
FY2022-FY2023 FY2024-FY2025 FY2025 to
Growth Rate
3.2%
Cost of Capital
4.25%
2.5%
5.20%
perpetuity
1.2%
4.80%
Considering this forecast he asked his CFO (you) to determine the
company's valuation using the NPV (net present value) method. Choose
the best answer from the list of options below.
For this question consider FY2022 as Year 1 and FY2025 as Year 4.
(NOTE THAT EXCEL WAS USED TO CALCULATE THE ANSWER TO
THIS PROBLEM)

Show more…

The Deamon Seed, a chain of Garden Supply Stores had a free cash
flow for FY 2021 of 5,250 (all amounts are in000). Stephen Kelley,
CEO, has developed a four year free cash projection, along with
estimated cost of capital during the 4 year period, and terminal growth and
cost of capital projections. – a copy of which has been reproduced in the
table below.
From the end of
FY2022-FY2023 FY2024-FY2025 FY2025 to
Growth Rate
3.2%
Cost of Capital
4.25%
2.5%
5.20%
perpetuity
1.2%
4.80%
Considering this forecast he asked his CFO (you) to determine the
company's valuation using the NPV (net present value) method. Choose
the best answer from the list of options below.
For this question consider FY2022 as Year 1 and FY2025 as Year 4.
(NOTE THAT EXCEL WAS USED TO CALCULATE THE ANSWER TO
THIS PROBLEM)

Added by Marc H.

Horngren’s Cost Accounting

Srikant M. Datar, Madhav V. Rajan 16th Edition

Instant Answer

Solved by Expert Madhur L

07/13/2023

Step 1

To calculate the present value of the free cash flows, we need to discount each cash flow by the corresponding cost of capital for that year. Year 1: Present Value = Free Cash Flow / (1 + Cost of Capital)^Year Present Value = $5,250 / (1 + 0.0425)^1 Present Show more…

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Thanks for your feedback!

The correct answer is $157,536. I got $164,470. I think I misunderstood something in this question, please help me with details. The Daemon Seed, a chain of Garden Supply Stores, had a free cash flow for FY 2021 of $5,250 (all amounts are in $000). Stephen Kelley, CEO, has developed a four-year free cash projection, along with estimated cost of capital during the four-year period, and terminal growth and cost of capital projections. - a copy of which has been reproduced in the table below. From the end of FY2022-FY2023 FY2024-FY2025 FY2025 to perpetuity Growth Rate 3.2% 2.5% 1.2% Cost of Capital 4.25% 5.20% 4.80% Considering this forecast, he asked his CFO (you) to determine the company's valuation using the NPV (net present value) method. Choose the best answer from the list of options below. For this question, consider FY2022 as Year 1 and FY2025 as Year 4. (NOTE THAT EXCEL WAS USED TO CALCULATE THE ANSWER TO THIS PROBLEM)

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Transcript

00:03 Hello students, in this question we have to compute the enterprise value.

00:07 So for computing the enterprise value, we will be first of all computing the present value of unlivered free cash flow from 2016 to 2020 using vac of 8 % and media convention.

00:27 So it will be for 2016.

00:32 It will be cash flow is 110 million divided by 1 plus 0 .08 divided by 2 to the power 1.

00:42 So it will give us dollar 102 .13 million.

00:48 Now for 2017, we're going to compute it is $120 million divided by 1 plus 0 .08 divided by 2 to the power 2.

00:57 So it will give us dollar 105 .93 million.

01:02 All values are in dollar and million.

01:04 2018 it will be 150 divided by 1 plus 0 .08 divided by 2 to the power 3.

01:13 So it will give us 123 .08 million.

01:17 For 2019, it will be 170 divided by 1 plus 0 .08 divided by 2 to the power 4.

01:25 So it will give us 129 .98.

01:33 So for 2020, it will be 200 million dollars divided by 1 plus 0 .08 divided by 2 to the power 5.

01:44 So it will give us 137 .68 million.

01:48 Now we are computing present value of unlivered funds for 2021 to 2023 using two -stage approach.

01:57 So for 2021, it will be 250 divided by 1 plus 0 .08 to the power 6.

02:10 It will give us 153 .47...

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