Free cash to firm

Free Cash Flow is the amount of cash flow a firm generates (net of
taxes) after taking into account non-cash expenses, changes in
operating assets and liabilities, and capital expenditures.
Two types of Free cash flows can be computed
1. Free cash flow to equity
2. Free cash flow to firm
We have prepared model for Free cash flow to firm
To build the model we have comprehensively used Capital asset pricing
model, Weighted average cost of capital model and lastly free cash flow
to firm model.
We have chosen a company from FMCG sector.
The FMCG sector is the fourth-largest in the economy which has
recorded growth even at times of recession and is regarded as one of
the pertinent sectors for investment.
Under FMCG sector we chose ITC Ltd. company as ITC is one of India's
foremost multi-business enterprises and is rated among the World's Best
Big Companies, Asia's 'Fab 50', and the World's Most Reputable
Companies by Forbes magazine. It is also rated as 'India's Most
Admired Company' in a survey conducted by Fortune India magazine
and Hay Group.
Now we will look into financial information of the company
Firstly, I want to state that we have taken two assumptions
First is perpetual growth rate as 14,9% taken from India Brand Equity
Foundation (IBEF) organization. It has revealed that the FMCG market in
India is expected to increase at a CAGR of 14.9% to reach US$ 220
billion by 2025.
Secondly, we have assumed outstanding shares as 1500. Outstanding
shares can be calculated as Common stock + preferred stock less
treasury stock. However, despite knowing its calculation, we weren’t able
to calculate as the data for treasury stocks isn’t available
Treasury stock, also known as treasury shares or reacquired stock,
refers to previously outstanding stock that is bought back from
stockholders by the issuing company. These shares are issued but no
longer outstanding and are not included in the distribution of dividends or
the calculation of earnings per share (EPS).
Now coming to capital asset pricing model
Risk free rate is considered as government 10-year bond rate.
Market return is calculated using NIFT FMCG data. Instead of using
NIFTY 50 data we have used data particularly for FMCG sector as it will
lead to more accuracy in computing different variables.
Beta is 0.67 which is directly taken from Money control website.
So, after applying formula for CAPM i.e., expected rate of return = Risk
free rate + Sensitivity*(market risk premium)
We got expected rate of return to be as 11.2%
Next is WACC computation
A firm’s Weighted Average Cost of Capital (WACC) represents its
blended cost of capital across all sources, including common shares,
preferred shares, and debt.
The given chart shows the calculation WACC
Firstly, we computed percentage of equity debt out of total capitalization.
Cost of equity is calculated using CAPM model and Cost of debt is
calculated as Finance cost divided by Total debt inclusive of Tax shield.
After computing cost of equity and debt, we calculated WACC and it
resulted as 9.28%.
Now Calculating FCFF model and forecasted data for 2022 to 2027
This FCFF 3 stage model.
We calculated FCFF or unlevered FCF by adjusting tax, depreciation
and amortization, changes in net working capital and capital expenditure.
Show calculations in Finance sheet
Capex is calculated by computing net increase in property, plant and
equipment and then adding depreciation expense to it.
Changes in net working capital is calculated by computing net working
capital annually. It is calculated as current assets less current liabilities.
Then Changes in NWC is calculated by deducting previous year’s NWC
from Current year’s NWC.
After calculating it for last 5 years we Forecasted FCFF for next 5 years
using average growth for previous mentioned years.
After forecasting we calculated Terminal value which is nothing but the
estimated present value of a business beyond the explicit forecast period
to be around Rs. 3 lac 50 thousand.
Then we calculated Present value for FCFF + terminal value and then
using present value data we finally computed Value of firm, Value of
equity and Value per share
Below two graphs are stating the trend of FCFF for last 5 years and
coming five years.
We can see in graph at left hand side that data bars are fluctuating due
to negative sign in change in NWC.
However, we can see that the graph for forecasted data is showing an
increasing trend as we have taken average growth rate of previous
years.