The following free cash flows (in $ Million) are projected for the next five years. The free cash flows are expected to grow at a stable rate of 7% for every year after year 5. The opportunity cost of capital is 10%. Calculate the current value of the firm using the constant growth model after year 5. As a first step calculate the terminal value of the firm at the end of year 5. Year                              Year 1     Year 2     Year 3     Year 4     Year 5 Free Cash Flow             5              12            24           44             69.

Value using Free Cash Flows (fcf).

Constant growth models can be used to determine the value of the company at the end year 5. The present value is calculated using a model that takes into consideration future cash flow expectations. The first step in this process is to calculate the terminal value which can be done by using the following formula: Terminal Value = (Future Cash Flows x (1+ Growth Rate)) / (Opportunity cost of Capital – Growth Rate).

Given that we’ve been provided with a set of expected free cash flows for years 1-5 as well as an opportunity cost of capital (10%) and a stable growth rate for years after 5 (7%) – we can use this formula to determine that our terminal value is $991 million.

From there – it becomes easier to calculate our current value. To calculate the current value, you simply multiply each individual cashflow amount by its value present factor. Add all those values up and then finally add in your calculated terminal value. Total, we would have a firm’s current value in year five equal to 2,492,000,000.

Ultimately – understanding how to utilize various models such as constant growth is essential when making investment decisions! By incorporating these techniques – businesses have access to powerful tools which enable them make data-driven choices based on accurate metrics and reliable information.