In this assignment you will
Calculate the intrinsic value of the company by conducting a two-stage DCF company-level valuation analysis,
Compare your results to the current market capitalization of the company and
Perform a sensitivity analysis.
The requirements of the assignment are as follows:
Calculate the Intrinsic Value of Your Company:
You will use the two-stage company-level Discounted Cash Flow (DCF) valuation model to calculate the intrinsic value of your chosen company.
Calculate the Free Cash Flow based on most recent fiscal year data:
Estimate the free cash flows (FCF) available to the firm. To do this you can use the below formula:
FCF = Cash Flow from Operations – Capital Expenditures + Interest * (1 – Tax Rate)
The “Cash Flow from Operations” and “Capital Expenditures” can be found on the Statement of Cash Flows in Yahoo! Finance.
The Interest expense (if any exists) is on the Income Statement.
The Tax Rate can be calculated based on the Tax Expense and Net income (as was performed in the first course project).
For additional details on these calculations please refer to this external resource.
Specify the WACC
For the discount value you should use the weighted average cost of capital (WACC). You can either use the value you calculated from the prior course project assignment or you can use the value generated by the website www.thatswacc.com.
Conduct a two-stage valuation
You can now combine the two items above to estimate a present value of the firm. You should calculate a high-growth phase value and a terminal value.
High Growth Phase Value: For this phase, assume that in years 1 – 3 the Free Cash Flows are growing by 8% annually.
Terminal Value: For this phase assume the FCF grow at a constant growth rate of 2.5%.
Calculate the present values of the above phases and add them together for the total present value of the company.
Comparison to Current Market Capitalization:
On the Key Statistics page in Yahoo! Finance identify and indicate the Market Capitalization (“market cap”). What does this value represent?
Compare the market cap to your calculated value.
To compare the market cap from Yahoo! Finance to the firm value you calculated in the previous section above you need to first subtract the value of the debt from your firm value calculation.
How does your intrinsic value (less debt) compare to the market cap of the company on Yahoo! Finance?
What might account for any differences between these two values?
Conduct a Sensitivity Analysis:
Vary the following inputs to the two-tier valuation model and indicate the new valuation amount and the percentage change from the above “base” case.
Free Cash Flows
Increase the FCF by 10%
Decrease the FCF by 10%
Terminal Growth Rate
Increase the Terminal Growth Rate from 2.5% to 3.5%
Decrease the Terminal Growth Rate from 2.5% to 1.5%
Add 2% to the WACC (that is if the WACC is 7.5% make it 9.5%)
Subtract 2% from the WACC (that is if the WACC is 7.5% make it 5.5%)
State your observations from the sensitivity analysis. How important (conceptually) is the terminal growth rate to overall value? How important is the WACC to overall value?
(Optional) Conduct an Industry Comparable Valuation Analysis:
In chapter 4 we saw how to conduct a stock valuation by the “comparable” methodology. Selecting two of the competitors you identified in the first course project assignment apply this methodology to calculate the value of your company’s equity.
How do the results compare relative to your intrinsic valuation in part 1 of this assignment and with the listed market capitalization of the company that you found on Yahoo! Finance?
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