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A firm has estimated Free Cash Flows of $300,000, $310,000 and $360,000 for the next three (3) years. If this firm has a WACC of 9.40% and expects these cash flows to grow by 2.10% in perpetuity, then what is the Terminal Value of these expected perpetual cash flows.

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Answer: $5,035,068.49

Explanation:

Terminal value is calculated based on the last cashflow and the growth rate in perpetuity.

The Gordon Growth Model is best used here:

= Free Cash Flow₄ / (WACC - Growth rate)

= (FCF₃ * (1 + growth rate) ) / (WACC -Growth rate)

= (360,000 * (1 + 2.10%)) / (9.40% - 2.10%)

= 367,560 / 7.3%

= $5,035,068.49

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