In evaluating BetaTech Corp, an innovative technology company, analysts have projected the following Free Cash Flows (FCF) over the next five years: Year 1: $150 million Year 2: $180 million Year 3: $210 million Year 4: $250 million Year 5: $300 million Beyond Year 5, the company is expected to grow its free cash flow at a stable growth rate of 4% per year indefinitely. The appropriate discount rate for BetaTech Corp is 10%. Using the Free Cash Flow valuation method, what is the estimated intrinsic value of BetaTech Corp’s equity today?

Exam

CFA Level 2

Section

Difficulty

Equity Investments

Valuation of BetaTech Corp Using Free Cash Flows

Very Hard Equity Valuation Applications Free Cash Flow Valuation

In evaluating BetaTech Corp, an innovative technology company, analysts have projected the following Free Cash Flows (FCF) over the next five years:

Year 1: $150 million
Year 2: $180 million
Year 3: $210 million
Year 4: $250 million
Year 5: $300 million

Beyond Year 5, the company is expected to grow its free cash flow at a stable growth rate of 4% per year indefinitely. The appropriate discount rate for BetaTech Corp is 10%.

Using the Free Cash Flow valuation method, what is the estimated intrinsic value of BetaTech Corp’s equity today?

Approximately $3.33 billion

Approximately $2.50 billion

Approximately $4.10 billion

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