The situation
Unlevered cash flow is ₹20 crore in year one and ₹24 crore in year two. From year three onward, cash flow is flat at ₹25 crore. WACC is 10%.
Your task
What operating value follows from these assumptions?
Reveal step-by-step solution
Set up the problem
Year-two terminal value = ₹25 ÷ 0.10 = ₹250 crore.
Work through the numbers
Discount year one and the year-two amounts: ₹20 ÷ 1.10 + (₹24 + ₹250) ÷ 1.10² ≈ ₹244.63 crore.
Interpret the result
This is operating value before the equity bridge. About ₹206.61 crore comes from discounted terminal value, so stress the assumptions.
What to remember
Label the date of terminal value before discounting. Keep financing flows out of unlevered cash flow.