2009
9,532
733
317
416
148
268
9,800
3,858
5,942
2008
8,186
355
249
106
38
4,149
(2,130)

68
8,254
7,571
438
333
105
37
68
7,639
2,363
2,019

2,363
6,235
5,276
Note that interest receipts are usually not reported, so interest income (that may include some
accrued interest) is taken as an approximation.
B. Valuation using DCF
Following the template in Exhibit 4.1, the valuation proceeds as follows:
2007
Fee cash flow
Discount rate (1.09t)
PV of FCF
Total PV of FCF to 2010
Continuing value (CV)
5,942 1.04
123,594
1.09 1.04
PV of CV =
123,594
1.295
Enterprise value
Net debt
Value of equity
2008
5,276
1.09
4,840
2009
2010
6,235
1.1881
5,248
5,942
1.2950
4,588
14,676
123,594
95,439
110,115
12,235 (23,417 11,182)
97,880
5,929
618
5,311
6,421
1,496
4,925
5,969
2,258
3,711
7,258
7,068
190
Though positive, the free cash flows are declining over the four years. If cash flows from
operations and cash investments were declining at about the same rate, we might conclude that
the firm indeed was in a state of decline: declining cash flows from the business lead to declining
investments. However, cash flows from operations are increasing and cash investment is
increasing at a faster rate: Coke is investing heavily. While free cash flow is declining over these
years, one would thus expect it to increase in future years as cash from the rising investment here
comes in. These cash flow are not a good indication of future free cash flows (and nor is the
$190 million of free cash flow in 2007 a good base to calculate a continuing value.)
If you were valuing Coke at the beginning of 2004 based on these subsequent cash flows, you
would have a big problem: you would have to forecast the cash flows after 2007 that the new
investment from 20052007 would produce. That is a difficult task, and it would extend the
forecast horizon to a point where outcomes are more uncertain.
The exercise is a good example of why free cash flow does not work, in principle: Investment
(which is made to generate cash flows actually decreases free cash flow, so rising investment
relative to cash flow from operations (lower free cash flow) typically means higher free cash
flow later.
E4.10. A Discounted Cash Flow Valuation: General Mills, Inc.
a. The exercise involves calculating free cash flows, discounting them to present value, then
adding the present value of a continuing value. For part (a) of the question, the continuing value
has no growth:
2005
Cash flow from operations
Cash investment in operations
Free cash flow (FCF)
Discount rate
Present value of FCF
Total of PV to 2009
5,419
Continuing value (CV)
PV of CV
12,885
Enterprise value
18,304
Net debt
6,192
Equity value
12,112
2006
2,014
300
1,714
1.09
1,572
2007
2,057
380
1,677
1.1881
1,411
2008
2009
2,095
2,107
442
470
1,653
1,637
1.2950
1.4116
1,276
1,160
CV (no growth) =
18,189
12,885
1.4116
PV of CV =
1,637 1.03
$28,102
1.09 1.03
5,419
28,102
19,908
25,327
6,192
19,135
18,189
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