Free Cash Flow Valuation of XYZ Biotech

Hard Equity Valuation Applications Free Cash Flow Valuation

XYZ Biotech, a company specializing in innovative healthcare solutions, has forecasted the following Free Cash Flows (FCF) for the next five years:

Year 1: $2 million, Year 2: $2.5 million, Year 3: $3 million, Year 4: $4 million, Year 5: $5 million. Beyond Year 5, the company expects the cash flows to grow at a constant rate of 4% annually.

The company has a weighted average cost of capital (WACC) of 10%. To calculate the intrinsic value of XYZ Biotech using the Free Cash Flow valuation method, which of the following statements about the final valuation calculation is correct?

The terminal value calculated at the end of Year 5 is $125 million.

The present value of the Free Cash Flows for Years 1 to 5 plus the present value of the terminal value is $19.25 million.

The correct discounting of the Free Cash Flows results in an intrinsic value of $20.00 million.

Hint

Submitted5.0K

Correct4.5K

% Correct89%