FCFF VALUATION - EXAMPLE

Details of the P&L statement and balance sheet of a firm are given below. Also given are projections of its
sales growth, operating expenses, working capital, and capital expenditure. Other details relevant to the firm's
cost of capital are also given.

Forecast the P&L statement, balance sheet and cash flow statement of the firm. Also, estimate its WACC. Thereafter,
estimate the value of the firm's equity shares using the FCFF method. Also, compute its value using the CCF method.
Confirm that the values obtained using the two methods are the same.

P&L Statement
Year 0 Year 1 Year 2 Year 3 Year 4
Sales 80.00
yoy growth% 25% 20% 15% 10%
Expenses 44.00 50.00 57.60 64.17 69.07
EBITDA 36.00
EBITDA% 45.0%
Depreciation 15.00
EBIT 21.00
Interest 9.60
EBT 11.40
Tax 3.42
PAT 7.98
Dividend 3.19

Balance Sheet
Year 0 Year 1 Year 2 Year 3 Year 4
Equity capital 50.00
Reserves & surplus 25.00
Net Debt (Debt - Cash) 100.00
Total 175.00
Net fixed assets 125.00
Net current assets ( excl. cash) 50.00 60.00 72.00 85.56 101.71
Total 175.00

Capital Expenditure
Year 0 Year 1 Year 2 Year 3 Year 4
Capital expenditure 10.00 10.00 10.80 9.66

Other Information

Tax Rate 30%

Payout Ratio 40%
Interest Rate 10%
Depreciation rate for new assets 10%
Shares Outstanding (Cr) 5.00
Terminal growth rate 4.0%
Target D/E of our company 0.75
Pre-tax cost of debt 10.00%
Marginal tax rate 30.00%
Expected return on market portfolio 15.00%
Risk-free rate 8.00%

Details of Comparable Firms

Peer 1 Peer 2 Peer 3 Peer 4
Equity Beta 1.20 1.40 1.60 1.80
D/E - 0.20 0.50 1.00

Assume debt beta of 0.

WACC. Thereafter,
the CCF method.

Rs Cr
Year 5

5%
71.73

Rs Cr
Year 5

122.73

Rs Cr
Year 5
6.07
FCFF VALUATION - EXAMPLE

Forecast

P&L Statement
Year 0 Year 1 Year 2 Year 3 Year 4
Sales 80.00 100.00 120.00 138.00 151.80
yoy growth% 25% 20% 15% 10%
Expenses 44.00 50.00 57.60 64.17 69.07
EBITDA 36.00 50.00 62.40 73.83 82.73
EBITDA% 45.0% 50.0% 52.0% 53.5% 54.5%
Depreciation 15.00 16.00 17.00 18.08 19.05
EBIT 21.00 34.00 45.40 55.75 63.69
Interest 9.60 9.69 8.86 7.65 6.08
EBT 11.40 24.31 36.54 48.10 57.60
Tax 3.42 7.29 10.96 14.43 17.28
PAT 7.98 17.02 25.58 33.67 40.32
Dividend 3.19 6.81 10.23 13.47 16.13

Balance Sheet
Year 0 Year 1 Year 2 Year 3 Year 4
Equity capital 50.00 50.00 50.00 50.00 50.00
Reserves & surplus 25.00 35.21 50.56 70.76 94.95
Net Debt (Debt - Cash) 100.00 93.79 83.44 69.52 52.09
Total 175.00 179.00 184.00 190.28 197.04
Net fixed assets 125.00 119.00 112.00 104.72 95.33
Net current assets ( excl. cash) 50.00 60.00 72.00 85.56 101.71
Total 175.00 179.00 184.00 190.28 197.04
- - - - -

Cash Flow Statement

Year 1 Year 2 Year 3 Year 4
EBITDA 50.00 62.40 73.83 82.73
Less: Interest (9.69) (8.86) (7.65) (6.08)
Less: Tax (7.29) (10.96) (14.43) (17.28)
Less: Dividend (6.81) (10.23) (13.47) (16.13)
Less: Capex (10.00) (10.00) (10.80) (9.66)
Less: Δ WC (other than cash) (10.00) (12.00) (13.56) (16.15)
Cash surplus/ requirement 6.21 10.35 13.92 17.43

FCFF Valuation
Year 1 Year 2 Year 3 Year 4
EBIT 34.00 45.40 55.75 63.69
Less: Tax on EBIT 10.20 13.62 16.73 19.11
EBIAT 23.80 31.78 39.03 44.58
Add: Depreciation 16.00 17.00 18.08 19.05
Less: Capex (10.00) (10.00) (10.80) (9.66)
Less: Δ WC (other than cash) (10.00) (12.00) (13.56) (16.15)
FCFF 19.80 26.78 32.75 37.82
Add: Terminal Value
FCFF (incl. TV) 19.80 26.78 32.75 37.82
Enterprise Value 285.11
Less: Net Debt (100.00)
Equity Value 185.11
Shares Outstanding (Cr) 5.00
Equity Value Per Share (Rs) 37.02

CCF Valuation
Year 1 Year 2 Year 3 Year 4
PV of FCFF at beginning of year 285.11 308.51 328.49 345.52
Estimated Debt 122.19 132.22 140.78 148.08
Estimated Interest 12.22 13.22 14.08 14.81
Estimated Tax Shield 3.67 3.97 4.22 4.44
FCFF (incl TV) 19.80 26.78 32.75 37.82
FCFF + Tax Shield 23.47 30.75 36.97 42.26
Enterprise Value 285.11
Less: Net Debt (100.00)
Equity Value 185.11
Shares Outstanding (Cr) 5.00
Equity Value Per Share (Rs) 37.02
 Other Information

Rs Cr Tax Rate 30%

Year 5 Payout Ratio 40%
159.39 Interest Rate 10%
5% Depreciation rate for new assets 10%
71.73 Shares Outstanding (Cr) 5.00
87.66 Terminal growth rate 4.0%
55.0% Target D/E of our company 0.75
19.65 Pre-tax cost of debt 10.00%
68.01 Marginal tax rate 30.00%
4.24 Expected return on market portfolio 15.00%
63.77 Risk-free rate 8.00%
19.13
44.64 Peer Peer 1 Peer 2 Peer 3
17.86 Equity Beta 1.20 1.40 1.60
D/E - 0.20 0.50
Rs Cr
Year 5 UNLEVERING AND RELEVERING BETA
50.00 Peer Peer 1 Peer 2 Peer 3
121.74 Unlevered Beta 1.20 1.17 1.07
32.75
204.48 Target D/E of our company 0.75
81.75 Equity (Levered) Beta of our company 1.90
122.73
204.48 CALCULATION OF WACC
- Pre-tax cost of debt 10.00%
Marginal tax rate 30.00%
Rs Cr Target DER 0.75
Year 5 Target D/V 0.43
87.66 Target E/V 0.57
(4.24) Expected return on market portfolio 15.00%
(19.13) Risk-free rate 8.00%
(17.86) Equity Beta 1.90
(6.07) Cost of equity 21.27%
(21.02) WACC 15.15%
19.34
EXPECTED RETURN ON ASSETS
Rs Cr Expected return on assets 16.44%
Year 5
68.01
20.40
47.61
19.65
(6.07)
 (21.02)
40.16
374.47
414.64

Rs Cr
Year 5
360.07
154.32
15.43
4.63
414.64
419.27
Peer 4 Average
1.80 1.50
1.00

Peer 4 Average
0.90 1.08