Corporate Finance: Discounted Cash Flow (DCF) Valuation

Estimating Expected Growth in EBIT

-EBIT growth is these two rates multiplied together

Determinants of firm value

-Existing assets are both physical and intangible -Factories, stores, etc -Patents, trademarks -The length of high-growth period depends on when competition catches up

FCFF include cash flows to

-FCF is split between creditors and shareholders

To obtain estimates of the firm's value of equity through the DCF approach we can

-Notes payable + Current portion of LT debt + LT debt -Current portion of LT debt is the LT debt that's due in the next 12 months -Equity = V - D -Value per share = Equity / # Common shares outstanding

Sensitivity Tables

-Part of spreadsheet but not sure of relevance for the quiz

Full DCF Example

-Unsure about how to get WACC -Don't know why interest expense if constant -Sales, EBITDA, and Depreciation all grow by the growth rate of 9.5% -EBIT is EBITDA - Depreciation -Pre-tax income is EBIT - Interest expense -Net income is Pre-tax income - Income taxes -NWC is 7% of sales for each (945 comes from the problem) -CAPEX also grew by 9.5% growth rate -Not sure how they got terminal value but its FCF(1+g) / (WACC-g) -No cash because wasn't mentioned -Debt is the market value of debt of 3.2 billion (not the book value terms one) -Equity value is Firm Value + Cash - Debt -Value per share is Equity Value / Number of shares -EPS in 2015 is Net Income / Number of shares

Step 2: Which tax rate to use?

-Use the marginal tax rate for finding terminal value

FCFF=

EBIT*(1-t) + Depreciation - CAPEX - ΔNWC -If NWC is positive, I think you decrease it -Net working capital is current assets minus current liabilities, so when this number increases, that means net current assets are increasing -In order for an asset to increase, cash must eventually decrease, so the change (or "investment in") working capital is subtracted from the FCFF calculation

Value per share =

Equity / # Common shares outstanding

Firm value 0 =

FCF1/(1+r)^t + TVn/(1+r)^n -r = Company WACC -n is typically 5 years

FCFF =

Free cash flow to the firm

Estimating the Terminal Value

TVn = FCFFn (1+g) / v-g -v = WACC -g is the long-term terminal growth rate