Discounted Cashflow Valuation

1. Dozier Corporation is a fast growing supplier of office products. Analyst Project the
following free cash flows during the next three years, after which FCF is expected to
grow at a constant 7%. Dozier’s WACC is 13%.

Year FCF in million

0 -
1 -$20
2 $30
3 $40

Estimate:

1. Horizon or continuing value of firm

2. Firm’s value today
3. If firm has $100 million of debt and 10 million of stock outstanding. What is the intrinsic
price per share?

2. Assume that today is December 31,2015 and that the following information applies to
ABC Ltd. :
 After Tax operating Income EBIT(1-T) is expected to be $500 million
 The depreciation expenses is expected to be $100 million.
 The capital expenditure are expected to be $200 million.
 No change is expected to in net operating working capital.
 The FCF is expected to grow at a constant rate of 6% per year.
 The required return on equity I 14%.
 The WACC is 10%.
 The market value of company’s Debt is $3 million.
 200 million shares of stocks are outstanding.

Value the firm and fair value of stock.

3. Costco Inc is evaluating a new project to produce widgets. The initial investment in plant
and equipment is Rs 500,000. Sales of widgets in year 1 are forecasted at Rs 300,000 and
 costs at Rs 100,000. Both are expected to increase at 10% a year. Profits are taxed at
35%. Working capital in each year consists of inventories of raw material and is
forecasted at 20% of sales. The equipment can be depreciated SLM over five years. The
applicable discount rate/cost of capital is 15%. The cash flows would grow at an average
rate of 6% into perpetuity from year 6. Capital expenditure and depreciation after year 5
may be ignored. Determine the value of the business.

4. Patanjali, the home grown Ayurved based FMCG conglomerate has been declared as
India’s most disruptive FMCG Company in 2016. And this declaration has come from
Assocham.“They have narrowed their gap with decades old FMCG firms from India like
Dabur (Rs 4233 crore revenue) , Marico (Rs 3903 crore revenue) and Godrej Consumer
(Rs 3585 crore revenue); and by 2017, they are expecting to become India’s 5th largest
FMCG company. In fact, all other Indian FMCG companies are growing at a modest
rate of 8%, while due to aggressive advertisements, low pricing and reach of deep rural
belts, Patanjali is growing at a breakneck speed of 100%+ year on year.”

You have recently learnt discounted cash flow analysis and are required to value Patanjali
Ayurveda Limited. As of 1st January 2016.

Comment on the value obtained given that Nestle India has an enterprise value of
approximately INR 597 Billion. Are there any grey areas in the assumptions?

Following financial data is available.

Income as on 31 December 2015 (INR Million) 20,141

Operating Expense excluding Depreciation 80% of revenue
Depreciation 3% of revenue
Capital Expenditure 2% of revenue
Working capital to be maintained at 20 % of revenue
WACC for the firm 15%
Growth rate for the next 3 years 2016 – 100%
2017 – 60%
2018 - 50%
2019 20%
Growth rate from year 2020 into perpetuity same as 8%
other FMCG firms in India
Tax Rate 30%
Working Capital Balance on December 31, 2015 4,400
(INR Million)
Case Study: Valuing a Business Division

In the face of disappointing earnings results and increasingly assertive institutional stockholders,
Eastman Kodak was considering a major restructuring in 1993. As part of this restructuring, it was
considering the sale of its health division, which earned $560 million in Earnings before Interest and
Taxes (EBIT) in 1993, on revenues of $5.285 billion. The expected growth in earnings was expected to
remain moderate to 6% between 1994 and 1998, and to 4% after that forever. Capital expenditures in
the health division amounted to $420 million in 1993, while depreciation was $350 million. Both are
expected to grow 4% a year in the long term. Working capital requirements are negligible.

The average beta of firms competing with Eastman Kodak's health division is 1.15. While Eastman Kodak
has 80% Debt and 20% equity, which is similar to the average debt ratio of firms competing in the health
sector. At this level of debt, the health division can expect to pay 7.5% on its debt, before taxes. (The tax
rate is 40%, the treasury bond rate is 7% and market risk premium is 5.5%.)

If you have been hired as a financial consultant to come up with the fair value of the division by
following DCF valuation method, What will be your take on the following questions posed by the CEO
firm:

A. The cost of capital for the division.

B. The value of the division if it the firm wishes to sale its division in the year 1993.

C. Why might an acquirer pay more than this estimated value?

Case Study: Firm and Equity Valuation

Lockheed Corporation, one of the largest defense contractors in the U.S., reported EBITDA of $1290
million in 1993, where interest expenses of $215 million and depreciation charges of $400 million.
Capital Expenditures in 1993 amounted to $450 million, and working capital was 7% of revenues (and
Revenues were $13,500 million). The firm had debt outstanding of $3.068 billion (in book value terms),
trading at a market value of $3.2 billion, and yielding a pre-tax interest rate of 8%. There were 62 million
shares outstanding, trading at $64 per share, and the most recent beta is 1.10. The tax rate for the firm
is 40%. (The treasury bond rate is 7% and market risk premium is 5.5%.)

The firm expects revenues, earnings, capital expenditures and depreciation to grow at 9.5% a year from
1994 to 1998, after which the growth rate is expected to drop to 4% perpetuity. The company has 50%
debt and 50% equity in its capital structure.

If you have been hired as a financial consultant to come up with the fair value of the division by
following DCF valuation method, What will be your take on the following questions posed by the CEO
firm:

A. The cost of capital for the division.

A. Estimate the value of the firm for the year 1993.

B. Estimate the value of the equity in the firm and the value per share.