Valuation of GreenTech Innovations via Free Cash Flow Method

Medium Equity Valuation Applications Free Cash Flow Valuation

GreenTech Innovations, a company focused on sustainable technologies, has projected its free cash flows (FCF) for the next five years as follows:

Year 1: $50 million
Year 2: $60 million
Year 3: $70 million
Year 4: $80 million
Year 5: $90 million

After Year 5, GreenTech expects a stable growth rate of 3% in its FCF. The appropriate discount rate for the company is 10%. To determine the value of the company using the free cash flow method, which set of steps should an analyst take to arrive at the company's terminal value and overall valuation?

Discount the projected FCF for the first five years, calculate the terminal value using the Gordon Growth Model, and sum the two present values.

Add the projected FCF for the five years directly to the expected terminal value and discount the total at the required rate.

Calculate the average FCF over the five years and multiply it by a random market multiple to arrive at a final valuation.

Hint

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