Answer:
correct option is b. $167
Explanation:
given data
free cash flow FCF 1 = -$10 million
t = 1
free cash flow FCF 2= $20 million
t = 2
FCF grow rate = 4%
average cost of capital = 14%
to find out
what is the firm's value of operations
solution
first we get here firm value in year 2 that is express as
firm value in year 2 = expected FCF in 3 ÷ (cost of capital - growth) .........1
put here value
firm value in year 2 = [tex]\frac{20*(1+0.04)}{0.14 - 0.04}[/tex]
firm value in year 2 = 208 million
and
firm value of operation this year will be as
firm value = discounted value in year 2 + discounted FCF1 and FCF2 .............2
firm value = [tex]\frac{208}{(1+0.14)^2} +\frac{20}{(1+0.14)^2} +\frac{-10}{(1+0.14)}[/tex]
firm value = 166.67 = 167 million
so correct option is b. $167
