You expect a portfolio firm's free cash flows to reach $20m in five years — when you expect the Exit to occur — and remain flat thereafter. What is your Exit Valuation estimate if the cost of public capital is 10%?

Question

BlackTom AI · Accepted Answer

A constant perpetuity’s value at the point it begins equals the recurring cash flow divided by the discount rate: V = FCF / r.

1) Relevant concepts
- Perpetuity formula: For constant cash flows with zero growth, terminal value V = FCF / r.
- “Exit Valuation” at year 5 means the value at that point in time (not discounted back to today).
- Cost of public capital (10%) is the discount rate r.

2) Step-by-step reasoning
- At the expected Exit (year 5), free cash flows have reached a constant $20m and are expected to remain flat forever. That is a zero-growth perpetuity starting immediately after year 5.
- Apply the zero-growth perpetuity formula to get the value at year 5.

3) Calculations (all intermediate steps)
- Formula: V_exit = FCF / r
- Substitute: V_exit = $20m / 0.10
- Compute: $20m ÷ 0.10 = $200m

4) Why this is correct
- The perpetuity formula directly applies because cash flows are constant indefinitely (growth g = 0). The cost of capital represents the discount rate investors require, so dividing the perpetual cash flow by that rate yields the value investors would pay at the time the perpetuity begins — i.e., the Exit valuation at year 5.

5) Why the other options are incorrect
- $205m: No economic basis here; it would imply an effective discount rate ≈ 9.756% or a small growth factor, neither given.
- $114m: This resembles a present value discounted to today (for example, $200m discounted 5 years at an incorrect rate) but the question asks for Exit Valuation at year 5, not present value.
- $164m: No consistent interpretation with the stated assumptions (constant FCF of $20m and 10% discount rate).

6) Conclusion
- Using V = FCF / r with FCF = $20m and r = 10% gives an Exit Valuation of $200m, which matches the provided correct answer.

You expect a portfolio firm's free cash flows to reach $20m in five years — when you expect the Exit to occur — and remain flat thereafter. What is your Exit Valuation estimate if the cost of public capital is 10%?单项选择题

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