Question: On January 1, 2004, shares of Company X trade at $6.50 per share, with 400 million shares outstanding. The company has net debt of $300 million. After building an earnings model for Company X, you have projected free cash flow for each year through 2010 as follows:
Year 2004 2005 2006 2007 2008 2009 2010
Free Cash Flow 110 120 150 170 200 250 280
You estimate that the weighted average cost of capital (WACC) for Company X is 10% and assume that free cash flows grow in perpetuity at 3.0% annually beyond 2010, the final projected year.
Calculate the terminal value and discount back to the present:
1. $1,922.0 million
2. $1,979.7 million
3. $2,114.2 million
4. $4,120.0 million