Furniture Forecasts a Free Cash Flow of $40 Million in Year

question 22

Multiple Choice

Furniture forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3?

• A) $840
• B) $882
• C) $926
• D) $972
• E) $1,021

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Definitions:

Variable Cost

Costs that change in proportion to the level of production or business activity, such as materials and labor.

Variable Cost

Costs that vary in direct proportion to changes in levels of production or business activity, such as materials and labor.

Fixed Cost

A cost that does not change with the volume of sales.

Fixed Costs

Expenses that do not change in proportion to the activity of a business, such as rent, salaries, and loan payments.