12 - Applied Discounted Cash Flow

12 - Applied Discounted Cash Flow - Building a DCF analysis...

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Unformatted text preview: Building a DCF analysis Chapter 12 Start with Unlevered Free Cash flows Free Cash Flow Calculation 1999 EBIT Less: Taxes on EBIT 40.0% 2000 $22.2 (9.3) Plus: Depreciation Plus: Amortization Less: Capex Less: Changes in Working Capital Unlevered Free Cash Flow Projected 2001 2002 $24.6 $27.3 (10.3) (11.3) 2003 $30.3 (12.5) 2004 $33.6 (13.8) 1.5 1.0 (2.0) (1.0) 1.5 1.0 (2.0) (1.1) 1.5 1.0 (2.0) (1.2) 1.5 1.0 (2.0) (1.3) 1.5 1.0 (2.0) (1.5) -----$12.4 -----$13.8 -----$15.3 -----$17.0 -----$18.8 Most of the components of the Unlevered Free Cash Flows section of the can simply be linked to the Income Statement or Cash Flow Statement Start with EBIT – operating Start with EBIT – operating earnings Calculate and subtract taxes on EBIT using the marginal tax rate Add back Depreciation and Amortization – Link them directly to the income statement. Link Capex to the Cash Flow Link Capex to the Cash Flow Statement Capex is already reflected as a negative cash flow on the Cash Flow Statement, so there's no need to add a negative sign Link the Changes in Working Link the Changes in Working Capital to the Cash Flow Statement This line item is already reflected as a negative cash flow on the Cash Flow Statement, so there's no need to add a negative sign. Add these up to get Unlevered Free Cash Flow Enterprise Value Calculation Enterprise Value Calculation Section 1999 2000 2001 2002 2003 2004 DCF Enterprise Value Calculation Terminal Value Calculation Terminal Value Growth Rate Projected Free Cash Flow Discount Rate (WACC) Terminal Enterprise Value Implied Term. Value EBITDA Multiple Discounted Cash Flows at WACC Unlevered Free Cash Flow Terminal Value Total Discounted Cash Flows 5.00% 19.7 12.00% 282 7.8x 11.1 214.4 11 10.9 10.8 -----11.1 -----11 -----10.9 -----10.8 10.7 160 -----170.7 Terminal Value Terminal Value Assume that the Unlevered Free Cash Flows will grow at a constant rate Note: You'll often calculate the Terminal Value of a business based upon a multiple of EBITDA instead Solving for the Terminal Value Solving for the Terminal Value Enter the Terminal Value Growth Rate – For now type 5% into this cell Discount Rate WACC – Type in the weighted average cost of capital Projected Unlevered Free Cash Projected Unlevered Free Cash Flow Projected Free Cash Flow = Free Cash Flowt­1 * (1 + Growth Rate) Calculating the terminal Value Calculating the terminal Value Use the Gordon Growth Model FCFt (1 + g ) TV = WACC − g Terminal Value is a critical part of almost every valuation. The assumptions underlying Terminal Value are extremely important and should be thought about carefully Checking the feasibility of your Checking the feasibility of your Terminal Value It is useful to calculate the EBITDA multiple implied by this Terminal Enterprise Value: EBITDA Multiple = Terminal Enterprise Value / Terminal Year EBITDA Now, discount back all of your cash Now, discount back all of your cash flows Discounted Cash Flows at WACC Unlevered Free Cash Flow 11.1 11 10.9 10.8 10.7 Terminal Value -----Total Discounted Cash Flows 214.4 ------ ------ ------ 160 ------ 11.1 11 10.9 10.8 170.7 This will imply and EBITDA multiple Enterprise Value / EBITDA Now, we need the value of the equity Solving for the value of equity Solving for the value of equity Enterprise Value = EBITDA Multiple * EBITDA EV = (Share Price) * (# Shares) + Preferred + Debt – Excess Cash So Equity = Enterprise Value ­ Preferred ­ Debt + Cash And price per share And price per share Share Price = (Enterprise Value – Net Debt) / # Shares Net Debt Net Debt Take these items off of the balance sheet Note, that we really should use excess cash, but it is common to use all cash # of shares # of shares Take this from the Income Statement Price per share Price per share Take computed equity value and divide by the number of shares Calculating the EBIDA Multiple Calculating the EBIDA Multiple Divide the DCF Enterprise Value by the last historical year's EBITDA on the Operating Assumptions page Calculating the implied P/E multiple Calculating the implied P/E multiple Divide DCF Value per Share by the first projected year's Earnings per Share on the Income Statement Summary DCF Valuation Summary DCF Valuation Section Summary DCF Valuation (PreDeal) DCF Enterprise Value Less: Net Debt (PreDeal) Equity Value Shares (PreDeal) DCF Value per Share $214.4 (86.0) -----128.4 10.000 $12.84 9.4x EBITDA 15.6x Proj EPS Building a Sensitivity Analysis Building a Sensitivity Analysis Sensitivity Analyses are typically used to understand the impact of the Discount Rate and the Terminal Value assumptions on the Discounted Cash Flow Analysis Calculate the Per Share Value at a range of Discount Rates and growth rates Use Excel’s NPV formula Use Excel’s NPV formula Value Per Share = (Net Present Value of Free Cash Flow + Net Present Value of Terminal Value – Debt) / # Shares =NPV(Discount Rate,Next Year's Cash Flow:Final Year's Cash Flow) Sensitivity Analysis Sensitivity Analysis DCF Value per Share Terminal Growth 3.0% 4.0% 5.0% 6.0% 7.0% 10.0% $14.32 17.38 21.66 28.08 38.78 WACC 12.0% $9.05 10.71 12.84 15.69 19.67 14.0% $5.70 6.72 7.95 9.50 11.49 0 1 2 3 4 5 $22.2 1.5 1.0 -----$24.7 (2.0) -----$22.7 (9.3) (1.0) -----$12.4 $24.6 1.5 1.0 -----$27.1 (2.0) -----$25.1 (10.3) (1.1) -----$13.8 $27.3 1.5 1.0 -----$29.8 (2.0) -----$27.8 (11.3) (1.2) -----$15.3 $30.3 1.5 1.0 -----$32.8 (2.0) -----$30.8 (12.5) (1.3) -----$17.0 $33.6 1.5 1.0 -----$36.1 (2.0) -----$34.1 (13.8) (1.5) -----$18.8 Free Cash Flow Calculation EBIT Plus: Depreciation Plus: Amortization EBITDA Less: Capex EBITDA Less Capex Less: Taxes on EBIT Less: Changes in Working Capital 40.0% Unlevered Free Cash Flow DCF Enterprise Value Calculation Terminal Value Calculation Terminal Value Growth Rate Projected Free Cash Flow Discount Rate (WACC) Terminal Enterprise Value Implied Term. Value EBITDA Multiple 5.0% 19.7 12.0% 282.0 7.8x Discounted Cash Flows at WACC Unlevered Free Cash Flow Terminal Value Total Discounted Cash Flows 11.1 214.4 11.0 10.9 10.8 -----11.1 -----11.0 -----10.9 -----10.8 10.7 160.0 -----170.7 Summary DCF Valuation (PreDeal) DCF Enterprise Value Less: Net Debt (PreDeal) Equity Value Shares (PreDeal) DCF Value per Share $214.4 (86.0) -----128.4 10.000 $12.84 9.4x EBITDA 15.6x Proj EPS DCF Value per Share Terminal Growth 3.0% 4.0% 5.0% 6.0% 7.0% 10.0% $14.32 17.38 21.66 28.08 38.78 12.0% $9.05 10.71 12.84 15.69 19.67 14.0% $5.70 6.72 7.95 9.50 11.49 ...
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This document was uploaded on 11/02/2011 for the course FINANCE 390 at Rutgers.

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