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Valuation Using DCF techniques

BoA is having 2 options to acquire a company suggest which one is better Option 1- They could acquire SBI by paying $ 2 million and expected cash flows for coming 10 years is $ 50,00,000 for coming 10 years. Assume expected life of SBI to be 10 years and interest rate to be 8%. Option 2- They could acquire American Express by paying $ 2.5 million and expected cash flows for coming 10 years is $ 55,00,000 for coming 10 years. Assume after 10 years American express could be sold for $ 1 Million and interest rate to be 8%.

NPV Net Present Value is discounting technique of Capital Budgeting. NPV = PV of Cash Inflow PV of Cash Outflow

Internal Rate of Return Also known as the economic rate of return, the internal rate of return (IRR) is an indication of the level of growth that can be expected from a project or acquisition. The calculation generates a percentage figure by comparing the value of the proposal s cash outflows with its cash inflows as they vary over the lifetime of the investment.

Calculate IRR
ABC Ltd. Is considering to acquire XYZ co. , the cost of the XYZ is 3,50,000 and the expected return for coming 6 years Year1 10,00,000 2 10,00,000 3 10,00,000 4 10,00,000 5 5,00,000 6 5,00,000 Calculate IRR

Free Cash Flow to Equity


Free Cash Flow to Equity FCFE = Net Income ( Capital Exp Dep) Change in Non Cash WC Principal Payments on Debt + New Debt Issue

Free Cash flow to the Firm FCFF= EBIT ( 1- T) ( Capex- Dep)- Change in noncash working capital

Reinvestment Rate = Capex

Dep + Change in Non cash WC EBIT (1-T)

Return on Capital =

EBIT (1 t) Capital Invested

Terminal Value = EBIT n+1 (1-t) 1 -

gn
ROCn

Cost of Capital

gn

In the special case where ROC is equal to the Cost of Capital Terminal Value= EBITn+1 (1-t) Cost of Capital

Expected growth rate = Reinvestment Rate * ROC

Value of Operating Assets + Cash & Nonoperation Assets = Value of Firm - Value of Debt = Value of Equity - Value of Equity Options = Value of Equity Stock

Enterprise Value
Enterprise Value is an economic measure reflecting the market value of an entire business. In practice, the calculation of company is being valued for sale (or purchase) - depends on the type of enterprise and its fundamentals .

Enterprise Value = Market Value of Equity + Market value of Debt Cash Holdings Enterprise Value Consolidated = Market Value of Equity + Debt Cash + Market Value of Minority Interests

In this question, we will estimate firm and enterprise value measures for Philips, a firm with two holdings a 60% stake in Videocon Television and a 10% stake of Latin Works, a record and CD company. The first holding is categorized as a majority, active holding (resulting in full consolidation) and the second as a minority holding. Here, we will try to estimate measures of firm value for Seville, using the following information.

The market value of equity at Philips is $1,500 million, the consolidated debt outstanding at the firm is $500 million and the consolidated cash balance is $150 million. A portion of the debt outstanding ($150 million) and the cash balance ($50 million) is attributable to Videocon Television. The minority interest in Videocon is shown in Philips balance sheet at $ 120 million. Videocon Television is a publicly traded firm with a market value of equity of $600 million. Latin Works is a private firm with an estimated value for equity of $ 400 million; the firm has $100 million in debt outstanding and $ 25 million as a cash balance .

Firm Value = Market Value of Equity + Debt = 1500 + 500 = $2,000 million Enterprise Value = Market Value of Equity + MV of Debt Cash = 1500 + 500 150 = $1,850 million

Enterprise Value = Market Value of Equity + Debt Cash + Minority Interests = 1500 + 500 150 + 120 = $ 1,970 million

Enterprise Value Consolidated = Market Value of Equity + Debt Cash + Market Value of Minority Interests = 1500 + 500 150 + .40 (600) = $2,090 million

Enterprise Value Consolidated but without minority holdings = Enterprise value Consolidated Market Value of Minority Holdings = 2,090 - .1 (400) = $2,050 million

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