Series 79 practice questionhardDCF Analysis
An analyst builds a 5-year DCF model with projected free cash flows of $20M, $22M, $25M, $28M, and $30M. The terminal value at the end of Year 5 is $400M and the WACC is 12%. What is closest to the enterprise value?
- A$310 million
- B$350 million
- C$315 million✓ Correct answer
- D$290 million
Explanation
Why C — $315 million
The enterprise value equals the sum of the present values of each year's free cash flow plus the present value of the terminal value. PV of FCFs: $20/1.12 + $22/1.2544 + $25/1.4049 + $28/1.5735 + $30/1.7623 = $17.86 + $17.54 + $17.80 + $17.80 + $17.02 = $88.02M. PV of terminal value: $400/1.7623 = $227.0M. Total enterprise value is approximately $88M + $227M = $315M. The terminal value typically represents a large share of total DCF value, often 60-80%.
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