Assume a company has expected free cash flows equal to $12,000 in Year 0, before making any new investments. It has a discount rate of 15%, and the inflation rate is 3%. If the company does not invest any of its free cash flows without new investment in Year 0, its cash flows will grow at the inflation rate. The company believes it could invest 20% of its free cash flows before new investment in perpetuity. Measure the value of the company under four scenarios: 

• no new investment is made; 
• the company makes a new investment each year and earns a 10%, 15%, and 20% nominal return on its investment annually and in perpetuity. 

What if the company invested 40% of its free cash flows before new investment and earned a 10%, 15%, or 20% nominal return?

Answer rating: 100% (QA)

To calculate the value of the company under the given scenarios we need to apply the discounted cash flow DCF method The DCF method values a company b... View the full answer