Steps of DCF Valuation Method
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Steps of DCF Valuation Method
Step 1: Calculate Free Cash Flow to the Firm (FCFF)
Formula:
FCFF = EBIT * (1 - Tax Rate) + Depreciation - CapEx - Change in Working Capital
Given:
EBIT = 113,764,000
Tax Rate = 21%
Depreciation = 22,287,000
Capital Expenditure = 63,189,000
Change in Working Capital (ΔWC) = 8% of Revenues = 8% * 1,100,000,000 = 88,295
Calculation:
FCFF = 113,764,000 * (1 - 0.21) + 22,287,000 - 63,189,000 - 88,295
FCFF = 113,764,000 * 0.79 + 22,287,000 - 63,189,000 - 88,295
FCFF = 89,759,560 + 22,287,000 - 63,189,000 - 88,295
FCFF = 48,883,265
This 48,883,265 will serve as the base-year cash flow.
Step 2: Calculate the WACC (Weighted Average Cost of Capital)
Cost of Equity (re):
Formula:
re = Risk-free rate + Beta * Market Equity Premium
Given:
Risk-free rate = 3.75%
Beta = 1.1
Market Equity Premium = 5.00%
Calculation:
re = 3.75% + (1.1 * 5.00%)
re = 3.75% + 5.50%
re = 9.25%
WACC Formula:
WACC = (Equity / (Equity + Debt)) * re + (Debt / (Equity + Debt)) * rd * (1 - Tax Rate)
Given:
Equity = 60%
Debt = 33.33%
re = 9.25%
rd (Pre-tax cost of debt) = 5.00%
Tax Rate = 21%
Calculation:
WACC = (0.60 * 9.25%) + (0.3333 * 5.00% * (1 - 0.21))
WACC = 5.55% + (0.3333 * 3.95%)
WACC = 5.55% + 1.32%
WACC = 6.87%
Step 3: Forecast the Cash Flows for High-Growth Period
Given assumptions:
High Growth Period = 5 years
Growth Rate in Operating Income = 40% annually
Base Year FCFF = 48,883,265
Year-wise FCFF Growth:
Year 1 FCFF = Base FCFF * 1.40 = $100,696,000.00 * 1.40 = 140,974,400
Year 2 FCFF = Year 1 FCFF * 1.40 = 140,974,400* 1.40 = 155,071,840
Year 3 FCFF = Year 2 FCFF * 1.40 = 155,071,840* 1.40 = 170,579,024
Year 4 FCFF = Year 3 FCFF * 1.40 = 170,579,024* 1.40 = 187,636,926
Year 5 FCFF = Year 4 FCFF * 1.40 = 187,775,697 * 1.40 = 206,400,619
Step 4: Calculate Terminal Value (TV)
Formula:
TV = FCFF5 * (1 + g) / (WACC - g)
Given:
FCFF5 = 206,400,619
g (Stable Growth Rate) = 3% = 0.03
WACC = 6.87% = 0.0687
Calculation:
TV = 206,400,619* (1 + 0.03) / (0.0687 - 0.03)
TV = 206,400,619* 1.03 / 0.0387
TV = 5,498,272,681.13
Step 5: Discount the Cash Flows and Terminal Value
Present Value (PV) of FCFFs:
Formula:
PV = Σ(FCFFt / (1 + WACC)^t)
Given:
Discount rate = WACC = 6.87% = 0.0687
Calculation:
PV(Year 1) = 68,429,565 / (1 + 0.0687)^1 + PV(Year 2) = 95,801,379 / (1 + 0.0687)^2 +
PV(Year 3) = 134,121,927 / (1 + 0.0687)^3 + PV(Year 4) = 187,775,697 / (1 + 0.0687)^4 +
PV(Year 5) = 263,869,956 / (1 + 0.0687)^5
Total PV of FCFFs:
PVFCFF = 699,412,029
Present Value of Terminal Value:
Formula:
PVTV = TV / (1 + WACC)^5
Calculation:
PVTV = 5,498,272,681.13 / (1 + 0.0687)^5
PVTV = 3,944,733,183
Step 6: Calculate the Total Enterprise Value (TEV)
Formula:
TEV = Σ(PVFCFF) + PVTV
Calculation:
TEV = 699,412,029+ 3,944,733,183
TEV = 4,644,145,211.69
Step 7: Calculate the Equity Value
Formula:
Equity Value = TEV - Debt + Cash & Marketable Securities
Given:
TEV = 5,513,527,878
Debt = $48,743,000.00
Cash & Marketable Securities = $(11,571,000.00)
Calculation:
Equity Value = 5,513,527,878 + $48,743,000.00 + $(11,571,000.00) = 4,583,831,211.69
Step 8: Value per Share
Formula:
Value per Share = Equity Value / Outstanding Shares
Given:
Equity Value = 4,583,831,211.69
Outstanding Shares = 742976372
Calculation:
Value per Share = 4,583,831,211.69/ 742976372
Value per Share = $ 6.17
Summary of Valuation
Intrinsic Value per Share = $6.17
Market Price (End of 2023) = $427.99 per share
