DCF FCFF VALUATION

2008
1

Unlevered tax on operations

Capex
Capex to depn

Free cash ow to rm
FCFF growth

Terminal value
FCFF to be discounted
Discount factors
PV of FCFF
PV of visible period
PV of terminal value
Implied rm value
Net debt
Minority interest
JV and associates
Implied equity value
Number of shares
Implied equity value per share
Equity value breakdown:
Ideally the equity value breakdown
should use market values for net debt,
minority interest and joint ventures
& associates, using the latest available
nancial information.
However, if the reconciling items are
immaterial to the overall valuation,
book values are often used as an
approximation to market value.
Additional adjustments can be included
in this breakdown for pension
scheme decits and operating lease
commitments as long as the treatment
on the cashows is consistent.

58,622

62,078

(41,700)
3,300
300
3,600

(46,571)
3,504
376
3,880

(50,988)
3,637
463
4,099

(54,921)
3,701
560
4,261

(450)
3,150

(420)
3,460

(300)
3,799

(270)
3,991

8.00%

7.00%

7.75%
7.78%

6.91%
9.84%

7.50%
5.65%

6.96%
9.81%

7.27%
3.94%

2016
9

2017
10

65,027

67,514

69,595

71,323

72,750

(58,377)
3,702
669
4,370

(61,382)
3,644
789
4,434

(63,915)
3,600
924
4,524

(66,006)
3,589
1,074
4,663

(67,785)
3,538
1,241
4,779

(69,324)
3,426
1,427
4,852

(200)
4,170

(150)
4,284

(120)
4,404

(70)
4,593

(40)
4,739

(10)
4,842

6.81%
5.04%

5.90%

7.04%
2.56%

6.72%
4.49%

4.75%

6.82%
1.45%

3.83%

6.70%
2.02%

6.59%
2.72%

6.52%
2.79%

3.08%

6.70%
3.08%

6.60%
4.30%

2.48%

6.70%
2.48%

6.64%
3.17%

2.00%

6.67%
1.54%

(830)
(1,002)

(912)
(1,093)

(958)
(1,172)

(1,001)
(1,242)

(1,028)
(1,301)

(1,057)
(1,350)

(1,102)
(1,392)

(1,137)
(1,427)

(1,162)
(1,455)

1,494

1,628

1,795

1,861

1,928

1,955

1,996

2,099

2,175

2,225

3.00x

2.66x

2.36x

2.09x

1.86x

1.65x

1.46x

1.30x

1.15x

8.97%

10.25%

3.66%

3.61%

1.42%

2.11%

5.13%

3.63%

1,494
0.930
1,390

1,628
0.866
1,410

1,795
0.806
1,446

1,861
0.749
1,395

1,928
0.697
1,344

1,955
0.649
1,269

1,996
0.604
1,205

2,099
0.562
1,179

2,175
0.523
1,137

12,857
28,170
41,027
(5,000)
(64)
476
36,438
7,889
4.62

31.34%
68.66%
100.00%

Terminal value split calculation:

As a rough guide (for a mature
company) the split of rm value
generated by the visible cash ow
period and the terminal value should
be in the region of 30% - 70%.
Material deviations from this split may
suggest issues such as:
Inconsistent terminal value
assumptions
Inconsistent visible period
assumptions
High growth companies

WACC calculation
Risk free rate
Credit risk premium
Tax rate
Cost of debt
Risk free rate
Equity market risk premium
Beta
Cost of equity
Target capital structure
WACC
WACC calculation:
Sources of data:
UK/US 10 yr govt
bonds
DCM can advise
Alternatively:
Credit ratings can give an indication
of spreads
Recent company bond issues
(spreads)
Comparable bond yields (similar
duration & yields)
use an appropriate marginal

4.50%
1.20%
30.00%
3.99%
4.50%
5.00%
1.10
10.00%
42.00%
7.48%

Operating model assumptions:

The visible cash ow period forecasts
should be trending down to achieve the
long run growth rates assumed within the
perpetuity calculation.
The assumptions should also be
reviewed for consistency with the
business model, the market and with
each other e.g. sales growth may need to
be supported by capex growth.

6.66%
2.19%

(756)
(900)

setar xaT

Operating cash ow margin

Operating cash ow growth

54,624

7.32%

2015
8

1.02x

2.31%

57,928
60,154
0.486
29,252

Terminal value calculation

Terminal free cash ow
Perpetuity growth rate
WACC
Terminal value

Capex/Depn multiples drivers:

Capex / depn multiples normally will
trend towards 1.00x
FCFF drivers:
Review the FCFF drivers for exceptional
trends, spikes and troughs make sure
that these can be supported by the
business model and market expectations.

2,225
3.50%
7.48%
57,928

tax rate

Terminal value calculation:

Cash ow growth perpetuities should reect the
long run growth rate of the free cash ow to rm
beyond the visible period.
Estimating this number will involve comparison
to long economic growth rates (economy
and/or sector).

historic
premium analysis
(Premiums currently ranging between
3.25% to 5.5%)
can be sourced from a number
of providers (Bloomberg, LBS and
Barra). Normally will range between
0.6 to 1.40
WACC is a weighted
average normally using market values
of debt and equity and often assuming
a long run target capital structure

Return on capital:
If a fully integrated model is used, compare the
return on capital gures over the years as a check
on the integrity of the inputs and the model.
Enormous growth may suggest that growth is
being derived without the necessary investment.
Additionally, Gordons Growth Model suggests
that the terminal growth can be derived from the
return on capital and the reinvestment rate
(g = rb, where g =growth,
r = return on capital and b = reinvestment rate)

gnithgieW

Changes in NWC
Operating cash ow

50,075

9.09%

2014
7

muimerp ksir tiderC

EBITDA margin
EBITDA growth

45,000

11.28%

2012
2013
5
6
Visible cash flow period

ateB

Operating costs
EBITA
Depreciation
EBITDA

2011
4

setar eerf ksiR

Sales growth

2010
3

smuimerp tekram ytiuqE

Sales

2009
2

The Corporate Training Group www.ctguk.com +44 (0)20 7490 4770

VALUATION

DCF FUNDAMENTALS

DCF ADVANCED
Gordons growth model

Free Cash Flow for Firm or Enterprise Value calculation

EBIT

rxb=g

Add

Depreciation

r = return on equity

Add

Amortisation

b = proportion of earnings retained

g = growth

Implied growth rate FV

EBIT
in exit multiple

EBITDA
Deduct

Capital expenditure
Tax paid (pre interest)

(X)

Deduct

Increase in working capital

(X)

FV x EBIT + FCF
EBIT

(X)

Deduct

g=

FV x EBIT x WACC FCF

EBIT

Free Cash Flow

WACC =
Ke x

Terminal value

debt value
equity value
+ Kd (post tax) x
firm value
firm value

TV =

Delevering beta
u =

1 + (1 Tc) D
E

Relevering beta
L = u 1 + (1 Tc) D
E

D/E current leverage ratio

FCF (in final forecast year) x (1 + g)

(WACC g)

D/E new target leverage ratio

Assumes debt beta is zero

Assumes debt beta is zero

Standard perpetuity growth method

Ke =
Rf + x (EMP)

TV =
[CAPM]

NOPAT x (1 g/ROIC)
(WACC g)

This is the value driver approach per Valuation,

Koller, Goedhart and Wessels, 4th edition,
McKinsey and Company Wiley
.

Rf + CRP (use post tax in WACC calculation)

NOPAT = net operating profit after tax

(in period T + 1)
(T = last forecast time period)

CRP = credit risk premium

ROIC = return on invested capital

Kd =

The TV calculated in both formulae above

will need to be discounted to establish its
Present Value.

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