This document outlines the discounted cash flow (DCF) approach for valuing a company, specifically Mercury. It involves 7 steps: 1) Calculating free cash flow (FCF) for Mercury, 2) Estimating Mercury's cost of debt, 3) Estimating Mercury's cost of equity, 4) Calculating Mercury's weighted average cost of capital (WACC), 5) Estimating Mercury's growth rate, 6) Calculating Mercury's terminal value, and 7) Determining the net present value of Mercury's FCF and terminal value to arrive at Mercury's firm value.

1. DCF APPROACH:
1. FCF of Mercury
2. Cost of Debt
3. Cost of Equity
4. WACC
5. Growth Rate
6. Terminal Value
7. NPV of FCF and TV

2. 1.FCF- NWC
• NET WORKING CAPITAL
= Total CA – Total CL
= Cash + Accounts Receivable +
Prepaid Exp – Accounts
Payable - Accrued Exp
• Change in NWC = NWCt – NWCt1

3. FCF-NWC

4. FCF=EBIT*(1-T)+ Dep – Change in NWC – CAP EXP

5. 2.Cost of debt
T = 40%
Rd = 6%
Radt = rd * (1-T)
= 6% * (1-40%)
= 3.6
3.Cost of Equity
D/E= 25% , Bu = 1.28 , rf = 5%, rm –rf = 4.93%
Be = Bu / (E/V)
= 1.28/.0.8
=1.6
Ke = rf +(rm –rf) * B
= 4.93 + 5 *1.6
=12.92

6. 4.WACC
• D/V = 20%
• E/V = 80%
• WACC = Rdat * D/V + Ke*E/V
= 3.6 % * 20% + 12.92% * 80%
= 11.06%

7. 5.Growth Rate
• Growth Rate= ROC * Reinvestment Rate
=NOPAT/Invested Capital * Net
Reinvestment/NOPAT

8. 6.Terminal Value
• Terminal Value= FCF of 2011 *(1+g)/(WACC-g)
7.PVFCF and PVTV
• PVFCF= FCF/(1+WACC)
• PVTV= TV/(1+WACC)^5
• FIRM VALUE= TOTAL TVFCF + PVTV+ CASH(of 2006)