The free cash flows (in millions) shown below are forecast by Parker & Sons. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments).
Year:1
2
Free cash flow:?$50
$100
A. $1,456
B. $1,529
C. $1,606
D. $1,686
E. $1,770
Answer: A
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