Business Valuation

DCF Exercises

9 de abril de 2021
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1) Discounted dividend model (Gordon). Discounting at the cost of equity (Ke) = 14%.

Year 0 1 2
Dividends 1.55 1,72
Price ? 42
First step, calculate discount factors:

Discount factor year 1 = 1 / (1+14%) ^ 1 = 0.877

Discount factor year 2 = 1 / (1+14%) ^ 2 = 0.769

Second step, calculate the present value of cash flows and the future price:

Present value flow 1 = 1.55 * 0.877 = 1.359

Present value flow 2 = 1.72 * 0.769 + 42 * 0.769 = 1.323 + 32.317 = 33.641

Price to be paid today = 1,359 + 33,641 = 35

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2) Similar exercise. Ke = 15%.

Año 0 1 2 3
Dividends 1.5 1.6 1.75
Price 54

Discount Factor 0.870 0.756 0.658

Present Value Cash Flows 1,304 1,210 1,151
Present Value Price 35,506

Present Value of Cash Flows + Present Value of Price = 39.17

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3) Gordon model: P = (Div0 * (1+g)) / (r-g) = Div1 / (r-g)

Div0 1.8
g est 3.50%
Beta 1.5
Rf 4%
Rm 8%

Step 1: Calculate Div1 = Div0 * (1 + 3.5%) = 1.863

Step 2: calculate discount rate→ What. Use CAPM→ Ke = 4% + 1,5*(8% - 4%) = 10%

Last step: price = 1,863 / (10% - 3.5%) = 28.66

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4) Calculate the implicit growth rate according to the discounted dividend model.

Starting from the formula P = (Div0 * (1+g)) / (r-g)→ I clear the rate g:

P 24,25
Div0 1,1
Ke 8.50%

24.25 = 1.1 * (1 + g) / (8.5% - g)→ g = 3.79%

5) Present Value of Growth Opportunities (PVGO)

P0 60
P = E1 / r + PVGO E1 5
What 10%
60 = 5 / 10% + PVGO → 60 = 50 + PVGO→ PVGO = 10
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5) Present Value of Growth Opportunities (PVGO)

A company with growth potential would benefit more if it reinvests those profits.
before paying them as dividends. This way, the fundamental value is not
represented not only by dividends but also by the present value of the
growth opportunities (PVGO).

The value of equity has 2 components according to this formula:

Perpetual value of earnings (E1/r)
Present value of growth opportunities

In 'growth' companies, most of the value is PVGO, whereas in 'value' companies the
Most of the value comes from the company's current assets.
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6) Discounted Dividend Model with extraordinary growth:

Div0 1
g extr. 10%
g 4%
Ke 12%
Step 1: Calculate dividends for the years of extraordinary growth.

Step 2: Calculate discount factors→ e.g. Year 2: 1/(1+12%)^2 = 0.797

Step 3: Calculate a terminal value at the end of year 3 (of extraordinary growth) =
TV= Div3 * (1+g) / (r-g) = 1,331 * (1+4%) / (12% - 4%) = 17,303
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6) Discounted Dividend Model with extraordinary growth:

Div0 1
g extr. 10%
g 4%
Ke 12%

Year 0 1 2 3
Div (grows to g extr.) 1 1,1 1.21 1,331
Discount Factor 0.893 0.797 0.712
Present Value Flows 0.982 0.965 0.947

Valor Terminal 17,303

VP Valor Terminal 12,316

Price 15,210
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7) Model H. Let's calculate the price given an r = 12%.

D0 0.75
t 5
H 2.5
gs 10%
gl 5%
r 12%
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Model H. We will calculate the price given an r = 12%.

Step 1: We calculate the first term (common Gordon model).

T1 = 0.75 * (1 + 5%) / (12% - 5%) = 11.25

Step 2: We add the second term that incorporates short-term growth

T2 = 0,75 * 2,5 * (10% - 5%) / (12% - 5%) = 1,34

D0 0.75
Precio = T1 + T2 = 12,59
t 5
H 2.5
gs 10%
gl 5%
r 12%
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Free Cash Flow to Equity (FCFE)→ discount to Ke.

FCFE 2.5
Rm 9%
Rf 4%
Beta 1.5
g est 4.5%

Paso 1: Calcular Ke → use CAPM→ Ke = 4% + 1.5 * (9% - 4%) = 11.5%.

Step 2: Price calculation→ modelo de un solo período.

P0 = FCFE0 * (1+g) / (r-g) = 2.5 * (1+4.5%) / (11.5% - 4.5%) = 37.32

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9) Free Cash Flow to the Firm (FCFF)→ discount to WACC.

I seek firm value. Single period model.

FCFF0 5
Debt 10
Tax 40%
Kd 8%
g is 5%
He 16%

I know that D / E = 25% and that D + E = 1→ E / (D+E) = 80% and D / (D+E) = 20%

Step 1: Calculate FCFF1 = 5.25

Step 2: WACC Calculation

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9) WACC Calculation: FCFF0 5

Debt 10
WACC = 80% * 16% + 20% * 8% * (1-40%) = 13,76% Tax 40%
Kd 8%
Once I have the WACC and the FCFF1, I calculate the firm value. g is 5%
Ke 16%
FV = FCFF1 / (WACC–g) =59,93

Equity Value = Valor Firma–Valor de mercado de la deuda = 59,93–10 =49,93

Exercise Guide

10) First, remember the formula of FCFF = NI + Int. (1–t) + Depr. – WK – Capex.

Year 0 1 2 3 4 5 6
Sales 20,000 22,000 24,200 26,620 29,282 32,210 33,821
Net Income 4,000 4,400 4,840 5,324 5,856 6,442 6,764
Interest (1-t) 2,400 2,640 2,904 3,194 3,514 3,865 4,058
Depreciation 3,000 3,300 3,630 3,993 4,392 4,832 5,073
CAPEX 2,000 2,200 2,420 2,662 2,928 3,221 5,073
Inv WC 1,500 1,650 1,815 1,997 2,196 2,416 2,537
FCFF 5,900 6,490 7,139 7,853 8,638 9,502 8,286

Once I have the flow of year 5, I can calculate that of year 6 with the data from
statement (I do not grow the last projection by (1+g)). With the FCFF of year 6 I can
calculate the terminal value.

TV = FCFF6 / (WACC perp. - g)→ I use the perpetual WACC only at this point.
Exercise Guide

10) Once all the FCFF and the TV are calculated, I calculate the discount factor of the flows.
per year, and the present value of each cash flow and the TV:

The present value of year 1 is the FCFF1 * discount factor 1.

Year 0 1 2 3 4 5
desc. factor 0.855 0.731 0.624 0.534 0.456
VP FCFF 5,547 5,215 4,903 4,610 4,334
Terminal Value 82,861
VP Terminal
Value 37,794

Firm Value = sum of PV FCFF + PV TV = 62.40

Exercise Guide

11) 1 2 3 4 5 6
Crecimiento Ventas 30,00% 25,00% 20,00% 15,00% 10,00% 5.00%
Net Margin 8,00% 7,50% 7,00% 6,00% 5,50% 5.00%

Remember the formula for FCFE = FCFF - Interest (1 - t) + net debt

= NI + Depreciation - Capex - Working Capital + Net Debt

For the exercise, the company does not pay interest and the data to calculate Capex is already provided.
net depreciation.→ FCFE = NI - (Capex - Depr.) - WK + indebtedness.

1 2 3 4 5 6
Sales 26.00 32.50 39.00 44.85 49.34 51.80
Net Income 2.08 2.44 2.73 2.69 2.71 2.59
Capex - Depr 1.80 1.95 1.95 1,755 1,346 0.74
WC inv 0.42 0.46 0.46 0,41 0.31 0.17
Indebtedness 0.89 0.96 0.96 0.87 0.66 0.37
Exercise Guide

11) Once I have calculated all the data I need, I derive the annual FCFE value. At the same time
calculate the TV with the values from the statement.

1 2 3 4 5 6
FCFE 0.75 0.99 1,29 1.39 1.72 2.04
Descent factor. 0.89 0.80 0.71 0.64 0.57
VP FCFE 0.67 0.79 0.92 0.88 0.97
Terminal Value 29.18
PV Terminal Value 16.56

Same logic as the previous exercise, I sum the PV of cash flows + PV TV to obtain the Equity.
Value =20,793.
Exercise Guide

12) a. Firm Value with a single-period model:

FCFF0 1.7
Firm Value = FCFF1 / (WACC–g) = 1.7 * (1+7%) / (11% - 7%) = 45.475 WACC 0.11
g 0.07
Equity Value = Firm Value–Debt = 45,475–15=30,475

FCFE0 1.3
b. Equity Value = FCFE1 / (Ke–g) =25,41
Ke 0.13
g 0.075
Exercise Guide

13) 1. Estimated value according to the assumptions:

We return to the Gordon Model where V = D1 / (r-g)

According to Daniel, dividends will continue to grow at an average rate of 5.3%.

To calculate r or Ke, Daniel uses CAPM with the data from the statement.→ Ke = 4% + 1.1 * (6.5%)
11.15%

→ V = 0.59 * (1 + 5.3%) / (11.15% - 5.3%) = 10.62

2. Current stock price = 8.42

Price + 10% = 11.68 / Price - 10% = 9.56→ it is undervalued. Current stock price
it is below Daniel's estimate, even with the 10% lower range.

Rentería believes that the current price of the stock is the fair value. I can clear the g
implicit according to the Gordon model.
Exercise Guide

13) 3. Rentería believes that the current price of the stock is the fair value. I can solve for g.
implicit according to the Gordon model.

Starting from the formula V = (Div0 * (1 + g)) / (Ke - g)→ I clear the rate g:
g = (V*Ke–Div0) / (Div0 + V) = 3.87%

4. P1 = P0 * (1 + implicit g) = 8.42 * (1 + 3.87%) = 8.75

Exercise Guide

14) I find the FCFE with the same formula as exercise 11.

(Data in billions) 1 2 3 4 5
Sales (grow by 28%) 5.50 7.04 9.01 11.53 14,76
NI = 32% of sales 1,76 2.25 2.88 3.69 4.72
FCInv - Dep = (35% - 9%) × sales 1,43 1.83 2.34 3,00 3,84
WCInv = (6% de ventas) 0.33 0.42 0.54 0,69 0.89
0.80 ×(FCInv − Dep + WCInv) 1.41 1.80 2.31 2,95 3.78
FCFE = NI − 0.80×(FCInv − Dep + WCInv) 0.352 0.45 0.58 0.74 0.94
With the data from the statement, I calculate the Ke with CAPM = 6.4% + 2.1*5% = 16.9%

The rest of the steps are to calculate the discount factors, the Terminal Value, and the values.
gifts of the flows.

I divide the final equity value by the number of shares to find the price.
Exercise Guide

14) Calculations:

In this case, the terminal value is calculated as a multiple of earnings.

1 2 3 4 5
PV of discounted FCFE at 16.9% 0.30 0.33 0.36 0.40 0.43
TV 85.04
PV of discounted TV 16.9% 38.95
Total PV of FCFE 1.82
Total value of equity 40.77

Stock Price 2,398

Exercise Guide

16) C. Dividends do not affect FCFE. FCFE indicates the amount of cash available for
the shareholders of the company, meaning that the shareholders can decide what to do
with that cash and one of the options they have available is the payment of dividends.

Looking at the formula, we see that option B is correct, and also that the dividends
generate post NI, which is the starting point of FCFE.

17) The exercise introduces multifactor models. In this case, we adjust by type.
industry, company size and by leverage. In this case, I assume that the Betas
son = 1→ build-up method
Return Country 6.50%
Once the return (discount rate) is achieved, Adjustment Industry 0.60%
and given the g of the statement, I calculate the value: Adjust Size -0.10%
Leverage Adjustment 0.25%
1300 * (1+3,5%) / (7,25% - 3,5%) =35.800
Required Return 7.25%
Exercise Guide

15) We consider the Firm Value as: Value of Operating Assets (generate cash
flows) + Significant Non-Operating Assets (not necessary for operations).

Activos Operativos = $ 720

Non-Operational Assets = $ 60 + $ 45 + ($ 210 - $ 170) = $ 145

Firm Value = $ 865

Equity Value = Firm Value–Valor de mercado de la deuda = $ 865 - $ 215 = $ 650

Value per share = $6.50