You are valuing a company as of the end of Year 0. The company is privately owned and 100% equity financed. The company’s free cash flow for the current year, Year 0, is $40 million, and management expects a free cash flow of $46.8 million next year (Year 1). Management expects the company’s free cash flows to grow at a growth rate of 3% for every year after Year 1. The company has one comparable company, which also uses only equity financing. The total firm (enterprise) value of the comparable company is $1,283.3 million. Its free cash flow for the current year, Year 0, is $60 million, and management expects its free cash flow to be $115.5 million in the following year, Year 1. The comparable company is also expected to grow at a growth rate of 3% for every year after Year 1. Management believes that the two companies have the same cost of capital of 12%.

(a) What is the free cash flow multiple of the comparable company based on its Year 0 and its expected Year 1 free cash flows? Why are they different?

(b) Value the privately owned company using the free cash flow market multiples of the comparable company based on both the Year 0 and expected Year 1 free cash flows. Why are the valuations different, and which one is more likely to be the better valuation?

(c) Measure the value of the privately owned company using the discounted cash flow valuation method and compare it to the free cash flow multiple valuations.