ABC Corporation is a growing firm dedicated to expanding its market share and increasing profitability. The company has projected its free cash flows (FCF) for the next five years as follows: Year 1: $2,000,000 Year 2: $2,500,000 Year 3: $3,000,000 Year 4: $3,500,000 Year 5: $4,000,000 After Year 5, ABC Corporation expects to grow its cash flows at a constant rate of 4% indefinitely. If the company has a discount rate of 10%, what is the present value of the free cash flows for the first five years?

Exam

CFA Level 2

Section

Difficulty

Equity Investments

Present Value of Free Cash Flows

Easy Equity Valuation Applications Free Cash Flow Valuation

ABC Corporation is a growing firm dedicated to expanding its market share and increasing profitability. The company has projected its free cash flows (FCF) for the next five years as follows:

Year 1: $2,000,000
Year 2: $2,500,000
Year 3: $3,000,000
Year 4: $3,500,000
Year 5: $4,000,000

After Year 5, ABC Corporation expects to grow its cash flows at a constant rate of 4% indefinitely. If the company has a discount rate of 10%, what is the present value of the free cash flows for the first five years?

$11,299,185

$10,000,000

$9,839,615

Hint

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