Calculating Expected Free Cash Flow Growth Rate

Portage Bay Enterprises Free Cash Flow Analysis

Portage Bay Enterprises has $1 million in excess cash, no debt, and is expected to have free cash flow of $10 million next year. Its free cash flow is then expected to grow at a rate of 3%.

Question:

What is the expected free cash flow for the year following the current one?

1) 13 million
2) 10.3 million
3) 10 million
4) 9.7 million

Final answer:

The expected free cash flow for the year following the current one, given a 3% growth rate on a base of $10 million, is $10.3 million.

Explanation:

The student's question is related to the valuation of a firm's free cash flow (FCF). Since the company is expected to have $10 million in free cash flow next year and a growth rate of 3%, we need to calculate the expected free cash flow for the following year. Using the formula for future value, FV = PV * (1 + g)^t, where PV is the present value, g is the growth rate, and t is the time period in years, we can calculate the FCF for the next year.

In this case, the present value PV is $10 million (the current year's FCF), the growth rate g is 3%, and the time period t is 1 year. Therefore, the calculation would be:

FCF for next year = $10 million * (1 + 0.03)^1 = $10 million * 1.03 = $10.3 million.

This is the expected free cash flow after one year considering the growth rate.