Determination of Free cash flows to firm

After tax operating earning

(+) Investments in long-term assets
(-) Investments in operating working capital
Operating free cash flows
(+) After tax non-operating income
(+) Decrease (minus increase) in non-operating assets
Free cash flows to firm
Continuing Value (Copeland et al8)
CV = FCFF/WACC - g

Problem 1
Step 1
Determination of WACC
Source of funds
Equity
12% Debt
WACC
Cost of Debt - Calculation
Ki
(1-t)
Kd

Cost (%) Weights Total

16.00
0.60 9.60
8.40
0.40 3.36
12.96

12
0.7
8.4

Step 2
Determination of Depreciation (Yrs 1-8)

Year
1
2
3
4
5
6
7
8

Long-term assets at
the beg of yr
170.00
148.75
133.24
130.25
131.96
141.92
141.88
133.35

Additions during
the year
5.00
8.00
20.00
25.00
35.00
25.00
15.00
10.00

Total at the
year end
175.00
156.75
153.24
155.25
166.96
166.92
156.88
143.35

(Rsmn)
Depreciation
@15%
26.25
23.51
22.99
23.29
25.04
25.04
23.53
21.50

Balance
148.75
133.24
130.25
131.96
141.92
141.88
133.35
121.85

Step 3
Determination of Investment (Capital Expenditure + Current Assets) Required, years 1-8

Year
1
2
3
4
5
6
7
8

Investment required
Capital expenditure CA (Sales * 0.2)
5
16
8
20
20
30
25
44
35
60
25
52
15
46
10
40

Existing Invesments
in CA
Total
21
28
50
69
95
77
61
50

30
16
20
30
44
60
52
46

red, years 1-8

(Rsmn)
Additional Investments
required
Nil
12
30
39
51
17
9
4

Sales
80
100
150
220
300
260
230
200

Step 4
Determination of Present value for Explicit Period of Projections (yr 1-8)
Particulars
Sales Revenue
Less: Expenses
Variable costs
Fixed cash operating costs
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Depreciation
EBIT
Less: Taxes (30%)
NOPAT
Non-operating income
Gross cash Flow
(NOPAT+Depn+Non-Op income)
Less: Investment in (Capital exp+CA)
Free cash Flow
PV Factor (WACC - 13%)
PV of FCF
Total PV

1
80

2
100

3
150

4
220

5
300

32
40
60
88
120
16
16
16
16
20
5
15
15
30
30
26.25 23.51 22.99 23.29 25.04
79.25 94.513 113.99 157.29 195.04
0.75 5.4875 36.014 62.712 104.96
0.23
1.65 10.80 18.81 31.49
0.53
3.84 25.21 43.90 73.47
0.50
0.00
0.00
0.00
0.00
27.28 27.35 48.20 67.19 98.51
0.00 12.00 30.00 39.00 51.00
27.28 15.35 18.20 28.19 47.51
0.88
0.78
0.69
0.61
0.54
24.137 12.024 12.611 17.287 25.788
178.86
1
1
1.13
0.88

1
2
1.28
0.78

1
3
1.44
0.69

1
4
1.63
0.61

1
5
1.84
0.54

6
260

(Rsmn)
7
8
230
200

104
92
80
20
20
20
30
10
10
25.04 23.53 21.50
179.04 145.53 131.5
80.962 84.468 68.498
24.29 25.34 20.55
56.67 59.13 47.95
0.00
0.00
0.00
81.71
17.00
64.71
0.48
31.082

82.66
9.00
73.66
0.43
31.31

69.45
4.00
65.45
0.38
24.62

1
6
2.08
0.48

1
7
2.35
0.43

1
8
2.66
0.38

Step 5
Determination of PV in respect of continuing value
CV = FCF9/(ko-g)
Calculation of CV
FCF 8
FCF 9
WACC (ko)
g
(ko-g)
CV
PV Factor
PV of CV

(Rsmn)
65.45
68.72
13%
5%
8%
859.04
0.3762
323.14

Step 6
Total value of the firm, based on DCF Approach
PV of Free cash flows during explicit period
PV of free cash flows after explicit period (CV)
Total value

(Rsmn)
178.86
323.14
502.00

Step 7
Value of equity
Total value of firm
Less: value of debt
Value of equity

(Rsmn)
502.00
80.00
422.00