John Smith would like to value XYZ Company using the discounted cash flow (DCF) method.

He forecasts Free Cash Flows (FCFs) of $135 million, $145 million, $146 million, respectively for years 1, 2, and 3. After year 3, he assumes FCFs will increase by 2 percent to perpetuity.

John gathers the information below (his "input variables") to compute Automaton's cost of equity, debt, and enterprise value.

Cost of Equity

Risk-Free-Rate = 3 percent

Beta = 1.03

Return of Market Portfolio (S&P 500) = 7 percent

Debt Financing

Debt to Equity Ratio = 45 percent

Market Value of Zero-Coupon Bonds = $100 million or 75 percent of par value

Maturity of Zero-Coupon Bonds = 15 years

Tax Rate = 35%

Using the Gordon Growth Model, what is XYZ Company's Terminal Value? Assume a perpetual growth rate, "g," of 2 percent and WACC of 8.9 percent, and use John's FCF forecasts.

	A.	$2158
	B.	$1673
	C.	$1641
	D.	$2116