You Are Trying to Value Madison Inc

Short Answer

You are trying to value Madison Inc. and have forecasted free cash flows to the firm (FCFF) for the terminal period of $513.8 million. You want to perform some sensitivity analysis. In particular, you want to determine the effect that terminal growth rates will have on the present value of the terminal period FCFF. Assume that the horizon period is four years long and that the terminal period begins in year five. The company's WACC is 7%.
a. Calculate the present value of the FCFF for the terminal period using an expected growth rate of 1%.
b. Now assume that the growth rate went up to 2%. Calculate the new present value of the FCFF for the terminal period.
c. Using these two figures, make a general observation about the relation between the effect of differing growth rates on the present value of FCFF for a terminal period. Is the growth rate an important assumption? Explain.