The document provides an overview of discounted cash flow (DCF) valuation. It discusses the history of DCF dating back to ancient times and its popularity after the 1929 stock market crash. It defines DCF valuation as estimating a company's value based on discounting its predicted future cash flows. The key steps in DCF valuation are estimating future cash flows, determining an appropriate discount rate, and calculating the present value of the future cash flows. DCF valuation requires numerous assumptions about cash flows, growth rates, and discount rates.
,
capital budgeting
,
concept of capital budgeting
,
the capital budgeting process
,
significance of capital budgeting
,
classification of investment project proposals
,
techniques of capital budgeting
,
types of project
This presentation is an overview of Capital Structure Theories.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
,
capital budgeting
,
concept of capital budgeting
,
the capital budgeting process
,
significance of capital budgeting
,
classification of investment project proposals
,
techniques of capital budgeting
,
types of project
This presentation is an overview of Capital Structure Theories.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
What is the 'Time Value of Money - TVM'
The time value of money (TVM) is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also referred to as present discounted value.
BREAKING DOWN 'Time Value of Money - TVM'
Money deposited in a savings account earns a certain interest rate. Rational investors prefer to receive money today rather than the same amount of money in the future because of money's potential to grow in value over a given period of time. Money earning an interest rate is said to be compounding in value.
BREAKING DOWN 'Compound Interest'
Compound Interest Formula
Compound interest is calculated by multiplying the principal amount by one plus the annual interest rate raised to the number of compound periods minus one.The total initial amount of the loan is then subtracted from the resulting value.
Describes in detail the steps involved in the calculation of Internal Rate of Return. Useful to students of Under graduate, post graduate and professional course students pursuing course in finance
The presentation slide is on stock valuation. We have tried to present the various techniques to stock valuation under which different methods are discussed with illustrations. Key concepts:
Zero Growth Model
Balance sheet Technique
Constant Growth Model
Two-stage growth Model
Feel Free to comment.
Capital Budgeting is about how one should evaluate the financing options based on the superior financial performance through mathematical techniques. These techniques have been discussed in the presentation in detail.
Projects may look attractive for two reasons:1) There are some errors in forecast 2)The company genuinely expects to earn excess profits.
So increase odds in your favor by moving in areas of competitive advantages.
Look at economic rents and where even advantage is absent or entry of competitors will push prices down or costs up, don’t enter .
When you have the market value of an asset use it..rather then over analysis…gold, real estate..airplanes etc…
PV calculations may vary and subject to error …that’s life!!!!!
What is the 'Time Value of Money - TVM'
The time value of money (TVM) is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also referred to as present discounted value.
BREAKING DOWN 'Time Value of Money - TVM'
Money deposited in a savings account earns a certain interest rate. Rational investors prefer to receive money today rather than the same amount of money in the future because of money's potential to grow in value over a given period of time. Money earning an interest rate is said to be compounding in value.
BREAKING DOWN 'Compound Interest'
Compound Interest Formula
Compound interest is calculated by multiplying the principal amount by one plus the annual interest rate raised to the number of compound periods minus one.The total initial amount of the loan is then subtracted from the resulting value.
Describes in detail the steps involved in the calculation of Internal Rate of Return. Useful to students of Under graduate, post graduate and professional course students pursuing course in finance
The presentation slide is on stock valuation. We have tried to present the various techniques to stock valuation under which different methods are discussed with illustrations. Key concepts:
Zero Growth Model
Balance sheet Technique
Constant Growth Model
Two-stage growth Model
Feel Free to comment.
Capital Budgeting is about how one should evaluate the financing options based on the superior financial performance through mathematical techniques. These techniques have been discussed in the presentation in detail.
Projects may look attractive for two reasons:1) There are some errors in forecast 2)The company genuinely expects to earn excess profits.
So increase odds in your favor by moving in areas of competitive advantages.
Look at economic rents and where even advantage is absent or entry of competitors will push prices down or costs up, don’t enter .
When you have the market value of an asset use it..rather then over analysis…gold, real estate..airplanes etc…
PV calculations may vary and subject to error …that’s life!!!!!
BlueBookAcademy.com - Value companies using Discounted Cash Flow Valuationbluebookacademy
In this slideshow on valuing companies using discounted cash flows (DCF), we'll run through the most popular valuation tool used by investment bankers, traders and investors to compute the value of a company's shares and make stock recommendations.
As a fundamental concept in finance, DCF models have wider applications in valuing bonds (fixed income) and in project appraisal.
This Slideshare presentation is a partial preview of the full business document. To view and download the full document, please go here:
http://flevy.com/browse/business-document/capital-investment-analysis-230
Capital Investment Analysis
Also called Capital Budgeting - a complex topic simplified in an easy to understand presentation which is completely self-explanatory. Explains the framework for financial analysis with examples and provides practical insights. Can be used for reference, training & self paced learning. The presentation includes examples worked in an Excel sheet.
Covers:
* The nature & characteristics of long term investments made by corporations
* The problem associated with measuring the rate of return with long term investments
* The approach to solving this problem
* The key methods used in calculating the rate of return and evaluating alternatives
* The practical aspects of the various inputs required to calculate the return on investment
* The basics of the risks associated with long term investments & how to factor ?in such risks
* The strategic considerations involved in long term investment decisions
* The processes involved in long term investment decisions & its implementation
Slide 1
8-1
Capital Budgeting
• Analysis of potential projects
• Long-term decisions
• Large expenditures
• Difficult/impossible to reverse
• Determines firm’s strategic direction
When a company is deciding whether to invest in a new project, large sums of money can be at stake. For
example, the Artic LNG project would build a pipeline from Alaska’s North Slope to allow natural gas to
be sent from the area. The cost of the pipeline and plant to clean the gas of impurities was expected to be
$45 to $65 billion. Decisions such as these long-term investments, with price tags in the billions, are
obviously major undertakings, and the risks and rewards must be carefully weighed. We called this the
capital budgeting decision. This module introduces you to the practice of capital budgeting. We will
consider a variety of techniques financial analysts and corporate executives routinely use for the capital
budgeting decisions.
1. Net Present Value (NPV)
2. Payback Period
3. Average Accounting Rate (AAR)
4. Internal Rate of Return (IRR) or Modified Internal Rate of Return (MIRR)
5. Profitability Index (PI)
Slide 2
8-2
• All cash flows considered?
• TVM considered?
• Risk-adjusted?
• Ability to rank projects?
• Indicates added value to the firm?
Good Decision Criteria
All things here are related to maximize the stock price. We need to ask ourselves the following
questions when evaluating capital budgeting decision rules:
Does the decision rule adjust for the time value of money?
Does the decision rule adjust for risk?
Does the decision rule provide information on whether we are creating value for the firm?
Slide 3
8-3
Net Present Value
• The difference between the market value of a
project and its cost
• How much value is created from undertaking
an investment?
Step 1: Estimate the expected future cash flows.
Step 2: Estimate the required return for projects of
this risk level.
Step 3: Find the present value of the cash flows and
subtract the initial investment to arrive at the Net
Present Value.
Net present value—the difference between the market value of an investment and its cost.
The NPV measures the increase in firm value, which is also the increase in the value of what the
shareholders own. Thus, making decisions with the NPV rule facilitates the achievement of our
goal – making decisions that will maximize shareholder wealth.
Slide 4
8-4
Net Present Value
Sum of the PVs of all cash flows
Initial cost often is CF0 and is an outflow.
NPV =∑
n
t = 0
CFt
(1 + R)t
NPV =∑
n
t = 1
CFt
(1 + R)t
- CF0
NOTE: t=0
Up to now, we’ve avoided cash flows at time t = 0, the summation begins with cash flow zero—
not one.
The PV of future cash flows is not NPV; rather, NPV is the amount remaining after offsetting the
PV of future cash flows with the initial cost. Thus, the NPV amount determines the incremental
value created by unde.
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
how to sell pi coins at high rate quickly.DOT TECH
Where can I sell my pi coins at a high rate.
Pi is not launched yet on any exchange. But one can easily sell his or her pi coins to investors who want to hold pi till mainnet launch.
This means crypto whales want to hold pi. And you can get a good rate for selling pi to them. I will leave the telegram contact of my personal pi vendor below.
A vendor is someone who buys from a miner and resell it to a holder or crypto whale.
Here is the telegram contact of my vendor:
@Pi_vendor_247
when will pi network coin be available on crypto exchange.DOT TECH
There is no set date for when Pi coins will enter the market.
However, the developers are working hard to get them released as soon as possible.
Once they are available, users will be able to exchange other cryptocurrencies for Pi coins on designated exchanges.
But for now the only way to sell your pi coins is through verified pi vendor.
Here is the telegram contact of my personal pi vendor
@Pi_vendor_247
how to sell pi coins in South Korea profitably.DOT TECH
Yes. You can sell your pi network coins in South Korea or any other country, by finding a verified pi merchant
What is a verified pi merchant?
Since pi network is not launched yet on any exchange, the only way you can sell pi coins is by selling to a verified pi merchant, and this is because pi network is not launched yet on any exchange and no pre-sale or ico offerings Is done on pi.
Since there is no pre-sale, the only way exchanges can get pi is by buying from miners. So a pi merchant facilitates these transactions by acting as a bridge for both transactions.
How can i find a pi vendor/merchant?
Well for those who haven't traded with a pi merchant or who don't already have one. I will leave the telegram id of my personal pi merchant who i trade pi with.
Tele gram: @Pi_vendor_247
#pi #sell #nigeria #pinetwork #picoins #sellpi #Nigerian #tradepi #pinetworkcoins #sellmypi
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
Introduction to Indian Financial System ()Avanish Goel
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
BYD SWOT Analysis and In-Depth Insights 2024.pptxmikemetalprod
Indepth analysis of the BYD 2024
BYD (Build Your Dreams) is a Chinese automaker and battery manufacturer that has snowballed over the past two decades to become a significant player in electric vehicles and global clean energy technology.
This SWOT analysis examines BYD's strengths, weaknesses, opportunities, and threats as it competes in the fast-changing automotive and energy storage industries.
Founded in 1995 and headquartered in Shenzhen, BYD started as a battery company before expanding into automobiles in the early 2000s.
Initially manufacturing gasoline-powered vehicles, BYD focused on plug-in hybrid and fully electric vehicles, leveraging its expertise in battery technology.
Today, BYD is the world’s largest electric vehicle manufacturer, delivering over 1.2 million electric cars globally. The company also produces electric buses, trucks, forklifts, and rail transit.
On the energy side, BYD is a major supplier of rechargeable batteries for cell phones, laptops, electric vehicles, and energy storage systems.
What website can I sell pi coins securely.DOT TECH
Currently there are no website or exchange that allow buying or selling of pi coins..
But you can still easily sell pi coins, by reselling it to exchanges/crypto whales interested in holding thousands of pi coins before the mainnet launch.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and resell to these crypto whales and holders of pi..
This is because pi network is not doing any pre-sale. The only way exchanges can get pi is by buying from miners and pi merchants stands in between the miners and the exchanges.
How can I sell my pi coins?
Selling pi coins is really easy, but first you need to migrate to mainnet wallet before you can do that. I will leave the telegram contact of my personal pi merchant to trade with.
Tele-gram.
@Pi_vendor_247
what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
Message: @Pi_vendor_247 on telegram if u want to sell PI COINS.
1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
2. DCF History:
DCF calculations have been used in financial
calculations as far back as ancient times. As a
method of asset valuation it has often been
opposed to accounting book value, which is
based on the amount paid for the asset. After the
stock market crash of 1929, DCF analysis gained
popularity for stock valuation. In its more current
economic form, Irving Fisher’s 1930 text “The
Theory of Interest” first discussed DCF as a
viable method of valuation.
3. Discounted Cash Flow (DCF) valuation is:
Discounted Cash Flow (DCF) valuation is a tool
for estimating the value of a company or its
shares.
Discounted cash flow (DCF) analysis is a method
of valuing a project (or a Company) using the
concept of time value of money and risk
4. Discounted Cash Flow (DCF) valuation is:
•a method of evaluating an investment opportunity
•by discounting predicted future cash flows generated
by the investment at certain discount rates
•to find out the present value of the investment in
monetary term
Application:
Mostly used in valuating securities (bonds or shares), companies
and
business projects.
Valuation of bonds using DCF is simple and straightforward
while
DCF valuation of shares, companies and business projects is
quite
complex leading several issues for debates exploration.
5. 1. DCF Model (Theory of Interest) by Fisher
(1930):
Where:
PV0 : Present value of cash flows (at time t = 0)
CFt : Cash flow at time t
ki : Discount rate or required rate of return for the
period i
n : Number of periods generating cash flows
6. 2. Value Additivity principle
The summation of present values of cash flows divided from
the same original cash flow will always equal the present
value of the original.
This principle is first demonstrated in MM Proposition I
with tax of Modigliani and Miller (1958) :
Vt = Dt + Et = Vut + VTSt (1)
Where:
Vt : value of the firm at time t
Dt : value of debt at time t
Et : value of equity at time t
Vut : value of unlevered equity at time t (value of the firm when
there is no
leverage, i.e. 100% equity)
VTSt : value of interest tax shield at time t
7. ASSUMPTIONS OF DCF ANALYSIS
According to Ronald W. Hilton
All cash flows are treated as though they occur at the
end of the year.
DCF methods treat cash flows associated with
investment projects as though they were known with
certainty, whereas risk adjustments can be made in
an NPV analysis to account—in part—for cash flow
uncertainties.
Methods assume that all cash inflows are reinvested
in other projects that earn returns for the company.
DCF analysis assumes a perfect capital market.
8. • Invest in projects that yield a return greater than the
minimum acceptable hurdle rate
• Return on projects should be measured based on:
– cash flows generated: Why cash flows and not
earnings?
– the timing of these cash flows: cash flows that
occur earlier value more than cash flows that occur
later.
– incremental cash flows: use cash flows that are
incremental related to the investment decision.
Discounted Cash Flow (DCF)
9. Why Cash Flows vs Accounting Earnings?
Accounting Earnings
One cannot spend earnings.
Shows revenues when products
and services are sold or provided,
not when they are paid for. Shows
expenses associated with these
revenues, not when expenses are
paid.
Net income includes a number of
non-cash adjustments to
approximate economic activity as
of (or over) a period of time.
Accounting adjustments do not
necessarily reflect the company’s
ability to pay its obligations or
invest for future growth.
Cash Flows
Cash flow reflects the company’s
ability to generate funds in order to
pay its obligations or invest for
future growth
Various Cash Flow measures (i.e. -
Free Cash Flow) adjusts accounting
income to arrive at the funds
available to pay stock and debt
holders. For example, taking out
Dividends provides one way to
compare cash flows across
Companies.
10. Discounted Cash Flow Valuation - DCF
• What is it: In discounted cash flow valuation, the
value of an asset is the present value of the expected
cash flow on the asset.
• Philosophical basis: Every asset has an intrinsic
value that can be estimated, based upon its
characteristics in terms of cash flows, growth and risk.
• Information needed: To use DSF valuation, you need
– To estimate the life of the asset
– To estimate the cash flow during the life of the asset
– To estimate the discount rate to apply to these cash
flows to get present value
• Market inefficiency: Markets are assumed to make
mistakes in pricing assets across time, and are
assumed to correct themselves over time, as new
information comes out about assets.
11. Valuing a company using a DCF model
Steps:
1. Understand the business of the company you are valuing
2. Find Inputs:
a) Calculate the Discount Rate
– Weighted Average Cost of Capital (WACC)
b) Build Future (Pro forma) Cash Flow and find the PV of these cash
flow
– Free Cash Flow (FCF)
c) Calculate Terminal Value
– EBITDA Multiple
3. Analyze Outputs:
a) Enterprise value (EV)
b) Equity (share price)
c) Perform Sensitivity Analysis
• There are many correct answers and many variations on methods
and which numbers to use (academics vs. practitioners).
12. Relevant & Irrelevant Cash Flows
Relevant Cash Flow
Flows that will be incurred as
a direct result of the project
(incremental cash flows)
Tax benefits (tax shield on
depreciation)
Opportunity Cost
Irrelevant Cash Flow
Flows that do not change as a
results of the project
Flows that have already occurred
(sunk costs)
Flows that would be incurred
regardless of the project
activities (replace equipment)
Non-cash items (depreciation)
13. Depreciation / Amortization / Capital
•While depreciation reduces taxable income and
taxes, it does not reduce cash flows.
•It is a non-cash expense; therefore, it needs to be
added back.
•There is a cash flow benefit associated with
depreciation – the tax benefit. In general, the tax
benefit from depreciation can be written as:
Tax Benefit = Depreciation * Tax Rate
•Capital expenditures (CAPEX) are not treated as
accounting expenses, but they do cause cash
outflows.
14. Working Capital
•The cash available for day-to-day operations of an
organization. Strictly speaking, one borrows cash
(and not working capital) to be able to buy assets or
to pay for obligations.
•Intuitively, money invested in inventory or in
accounts receivable cannot be used elsewhere.
Therefore, it represents a drain on cash flows.
15. To get from accounting earnings to cash flows:
Free Cash Flow =Before Tax Profit (BTP) or EBIT
- Taxes
+ Add back Depreciation/Amortization
+/- Change in Working Capital
- Capital Expenditures
16. Fundamentals of any Discounted Cash Flow Valuation
Expected cashflow in each period
Divided by the appropriate discount factor that reflects the
riskiness of the estimated cashflows
Example: How much is an infinite stream of ISK 15 million/year
worth?
Assuming a 10% discount rate:
...
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Expected
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Discount rate
Year
17.
18. Structure of a DCF model
Year 2011 2012 2013 2014 2015 2016 ……..
Period 0 1 2 3 4 5 ……..
FCF C1 C2 C3 C4 C5 ……..
……..
Terminal
value
(TV)
PV (CF) C1/
(1+r)1
C1/
(1+r)1
C1/
(1+r)1
C1/
(1+r)1
(C1+TV)
/(1+r)1
Sum of
PV(CF)
EV
Input: Cash Flow
Output: Value (Enterprise Value)
EV of the company as of the
end of year 2011
Company
enters
steady
state
Year 1 to 5: Capture changes and volatility in the
business (cash flow)
Industry standard:
5 to 10 yr horizon
19. DCF Example
Lemonade Stand Business
Year 0 Year 1 Year 2 Year 3
Initial Cost (50,000)
Taxes (34%) (25,500) (28,560) (34,000)
Operating Income 75,000 84,000 100,000
Income $49,500 $55,440 $66,000
Plus: Depreciation 3,750 4,200 5,000
Minus: working capital 1,500 1,000 1,600
Minus: CapEx 3,000 4,040 4,400
Free Cash Flow ($50,000) $48,750 $54,600 $65,000
Discount Rate 10%
Discounted Values ($50,000) $44,318 $45,123 $48,835
Present Value $88,277
21. Determining Discount Rates
The discount rate should be determined in accordance with the
following factors:
Riskiness of the business or project—The higher the risk, the
higher the required rate of return.
Size of the company—Studies indicate that returns are also
related inversely to the size of the entity. That is, a larger
company will provide lower rates of return than a smaller
company of otherwise similar nature.
Time horizon—Generally, yield curves are upward sloping (longer
term instruments command a higher interest rate); therefore, cash
flows to be received over longer periods may require a slight
premium in interest, or discount, rate.
22. •Debt/equity ratio—The leverage of the company drives the
mix of debt and equity rates in the overall cost of capital
equation. This is a factor that can be of considerable
importance, since rates of return on debt and equity within
a company can vary considerably.
•Real or nominal basis—Market rates of interest or return
are on a nominal basis. If the cash flow projections are
done on a real basis (non-inflation adjusted), then the
discount rate must be converted to real terms.
• Income tax considerations—If the cash flows under
consideration are on an after-tax basis, then the discount
rate should be calculated using an after-tax cost of debt in
the cost of capital equation.
23. Weighted Average Cost of Capital Definition
•Weighted Average Cost of Capital (WACC) is
•the minimum rate of return that must be realized
•in order to satisfy investors: both debt holders and
shareholders.
Project
Returns >
Cost of
Equity +
Cost of
Debt
24. Calculating WACC
Cost of Capital has two components:
Cost of equity (rk)
After tax Cost of debt (rd)
These are multiplied by the relative weight of
their market values to arrive at an average cost:
WACC = rk * (E/(D+E)) + rd * (D/(D+E))
E = market value of equity
D = market value of debt
25. Advantages of DCF valuation
• Since DCF valuation, done right, is based upon an
asset’s fundamentals, it should be less exposed to
market moods and perceptions.
• If good investors buy businesses, rather than stocks,
discounted cash flow valuation is the right way to think
about what you are getting when you buy asset.
• DCF valuation forces you to think about the underlying
characteristics of the firm, and understand its business.
If nothing else, it brings you face to face with the
assumptions you are making when you pay a given price
for an asset.
26. Advantages of DCF valuation
Can offer a more accurate picture of
fundamental valuation drivers
Can evaluate different scenarios
Uses cash flows, not earnings or
accounting measures
Useful as a sanity check of over/under valued
27. Disadvantages of DCF valuation
• Since it is an attempt to estimate intrinsic value, it
requires far more inputs and information than other
valuation approaches.
• These inputs and information are not only difficult to
estimate, but can be manipulated by analyst to provide
the conclusion he or she wants.
• In an intrinsic valuation model, there is no guarantee
that anything will emerge as under or over valued.
Thus, it is possible in a DCF valuation model, to find
every stock in a market to be over valued . This can be
a problem for
– Equity research analysts, whose job it is to follow sectors and
make recommendations on the most under and over valued
stocks
– Equity portfolio managers, who have to be fully (or close to
fully) invested in equities.
28. Disadvantages of DCF valuation
Highly sensitive to discount rate
Highly sensitive to terminal growth rate
Discount rate changes over time
Difficult to apply for early stage companies
without cash flows
29. DCF
Strengths:
• Captures the time value of money and opportunity cost
• Scientific
• Widely used
• Based on cash flow
• Weaknesses:
• Almost always results in overvaluation. Why?
• Can we ever predict the future?
• “Forecasts may tell you a great deal about the forecaster; they
tell you nothing about the future.” Warren Buffett
• Based on many assumptions
• Which assumptions are the most critical?
• 5 years vs. 10 years estimation
30. 6 Steps to Build a DCF
1. Calculate a free cash flow:
2. Discounting a single cash flow:
– PV = CF1 / (1+r)
3. Discounting a single cash flow in “n” years from now:
– PV = CFn / (1+r)n
4. Multiple cash flows in future:
– PV = CF1 / (1+r) + CF2 / (1+r)2 + CF3 / (1+r)3 + …
5. Growing Perpetuity: TV
– PV = CF / (r-g) (1st CF at end of year 1, then grow at g)
6. Deduct Net Debt from Enterprise Value to calculate
Equity Value:
– Enterprise Value - Net Debt = Equity Value
31. Cashflow to Firm
EBIT (1-t)
- (Cap Ex - Depr)
- Change in WC
= FCFF
Expected Growth
Reinvestment Rate
* Return on Capital
FCFF1 FCFF2 FCFF3 FCFF4 FCFF5
Forever
Firm is in stable growth:
Grows at constant rate
forever
Terminal Value= FCFF n+1/(r-gn)
FCFFn
.........
Cost of Equity Cost of Debt
(Riskfree Rate
+ Default Spread) (1-t)
Weights
Based on Market Value
Discount at WACC= Cost of Equity (Equity/(Debt + Equity)) + Cost of Debt (Debt/(Debt+ Equity))
Value of Operating Assets
+ Cash & Non-op Assets
= Value of Firm
- Value of Debt
= Value of Equity
Riskfree Rate :
- No default risk
- No reinvestment risk
- In same currency and
in same terms (real or
nominal as cash flows
+
Beta
- Measures market risk X
Risk Premium
- Premium for average
risk investment
Type of
Business
Operating
Leverage
Financial
Leverage
Base Equity
Premium
Country Risk
Premium
VALUING A FIRM