Problem 1: (Value of operation of constant growth firm)
EMC Corporation has never paid a dividend. Its current free cash flow is $400,000 and is expected to grow at a constant rate of 5%. The weighted average cost of capital is WACC =12%. Calculate EMC's value of operations.
Problem 2: (Value of operations)
Brooks Enterprise has never paid a dividend. Free cash flow is projected to be $80,l000 and $100,000 for the next 2 years, respectively, and after the second year it is expected to grow at a constant rate of 8%. The company's weighted average cost of capital is WACC = 12%.
A) What is the terminal, or horizontal, value of operations? (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2.)
B) Calculate the value of Brook's operations.