III.%20DCF%20Methods

III.%20DCF%20Methods - III. DCF Methods We take up five DCF...

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1 III. DCF Methods We take up five DCF methods to value the firm with perpetual cash flow, a constant debt ratio, and risk-free debt. A. NPV B. IRR C. APV D. FTE E. CCF
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2 Present value 1 2 t t+1 t+2 d 1 d 2 d t d t+1 d t+2 In classic form the stock price is the present value of all of its dividends 1 2 0 1 2 1 1 1 1 1 t t t t t d d d d P ... ... ( r) ( r) ( r) ( r) ¥ = = + + + + = + + + +
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3 Terminal value and interim vale In valuing assets we won’t use infinite streams. Instead, we separate value into two parts Value = present value of interim cash flows + present value of time T “terminal value” (what it can be sold for at T)
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4 Terminal value, TV, & interim cash flows 0 1 2 T d 1 d 2 d T +TV T 1 2 0 1 2 1 1 1 1 1 1 T T T T t T t t T d d d TV P ... ( r) ( r) ( r) ( r) where terminal value is d TV ( r) ¥ = + = + + + + + + + + = +
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5 Terminal value and interim cash flows In valuation, it is thus customary to specify the interim cash flows and the terminal value. We follow this approach.
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6 Example III.1, Project V-Plus New Project V-Plus requires initial investment of $825, financed partly with $375 of 8% debt, generates perpetual earnings before interest of $150, the corporate tax rate is 30%. The cost of capital for V- Plus is 11.67%. Depreciation and capital expenditures are $20, working capital is 0. We specify cash flows for the first three periods and measure the terminal value at T = 3 Data for V-Plus are organized as follows
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7 end year 1 2 3 4 EBIT 150 150 150 -r B B -30 -30 -30 EBT 120 120 120 -taxes@30% -36 -36 -36 NI 84 84 84 D Dep. 20 20 20 D Capex. -20 -20 -20 D WC 0 0 0 Available cash flow 84 84 84 Principal payments 0 0 0 Equity cash flow 84 84 84 annual cash flows, Project V-Plus
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8 end year 1 2 3 4 Beginning debt 375 375 375 r B B 30 30 30 Principal payments 0 0 0 Ending debt 375 375 375 375 annual debt schedule, Project V-Plus
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end year 1 2 3 4 Ending MV equity 525 525 525 Ending debt + equity 900 900 900 Debt/Value .42 .42 .42 Equity/Value .58 .58 .58 b O .6275 .6275 .6275
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III.%20DCF%20Methods - III. DCF Methods We take up five DCF...

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