Super Charged Corp.’s free cash flows are forecast to be $152 million in one year, $235 million in two years, and $372 million in three years. Its free cash flows are expected to increase by 2% every year after three years. Super Charged Corp.’s weighted average cost of capital is 11%. What is the enterprise value of Super Charged Corp.?

Enter your answer in millions and round to the nearest one-hundredth of a million dollars. Do not include the dollar sign ($).

Question

Super Charged Corp.’s free cash flows are forecast to be $152 million in one year, $235 million in two years, and $372 million in three years.  Its free cash flows are expected to increase by 2% every year after three years.  Super Charged Corp.’s weighted average cost of capital is 11%.  What is the enterprise value of Super Charged Corp.?

Enter your answer in millions and round to the nearest one-hundredth of a million dollars.  Do not include the dollar sign ($).

BlackTom AI · Accepted Answer

DCF: present value of the explicit FCFs plus the present value of the terminal value (Gordon growth).

1) Relevant knowledge points and formulas
- Discount each free cash flow (FCFt) to present using PV = FCFt / (1 + WACC)^t.
- Terminal value at t=3 using the Gordon growth model: TV3 = FCF4 / (WACC − g), where FCF4 = FCF3 × (1 + g).
- Sum PVs of forecast FCFs and PV of terminal value to get enterprise value.

2) Step-by-step reasoning and values
- Given: FCF1 = 152, FCF2 = 235, FCF3 = 372 (millions); g = 2% = 0.02; WACC = 11% = 0.11.
- Compute FCF4 = 372 × 1.02 = 379.44.

3) Terminal value calculation (intermediate steps)
- TV3 = FCF4 / (WACC − g) = 379.44 / (0.11 − 0.02) = 379.44 / 0.09 = 4,216.00 (millions).

4) Discount factors and PV calculations (showing intermediate steps)
- Discount factor for t=1: 1/(1.11) = 0.9009009009 → PV1 = 152 × 0.9009009009 = 136.93694
- Discount factor for t=2: 1/(1.11^2) = 1/1.2321 = 0.811619 → PV2 = 235 × 0.811619 = 190.7295
- Discount factor for t=3: 1/(1.11^3) = 1/1.367631 = 0.731191 → PV3 = 372 × 0.731191 = 272.0017
- PV of terminal value: PV_TV = 4,216.00 × 0.731191 = 3,082.697

5) Sum to get enterprise value and why this is correct
- Enterprise value = PV1 + PV2 + PV3 + PV_TV
- = 136.93694 + 190.7295 + 272.0017 + 3,082.697 = 3,682.36514 ≈ 3,682.37 (millions).
- This method is correct because it explicitly values near-term cash flows and captures all subsequent cash flows via a perpetuity growing at g, discounted at the firm’s WACC.

6) Other common mistakes (why alternatives are incorrect)
- Using FCF3 (372) instead of FCF4 (379.44) in the TV numerator understates the terminal value.
- Omitting the discounting of the terminal value or using the wrong discount rate/growth rate leads to incorrect enterprise values.

Conclusion: The enterprise value is 3,682.37 million, which matches the provided answer 3682.37.

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