Valuation Project Report: Calculation of Value of Firm, Equity and Cost of Capital

This project report discusses the calculation of value of firm, equity and cost of capital using various methods such as FCFF, FCFE and CAPM. It also includes the valuation of equity taking free cash flows of firm and references.

Running Head: Valuation
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Project Report: Valuation

Valuation
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Contents
Assignment 1....................................................................................................................3
Question a.....................................................................................................................3
Question b.....................................................................................................................3
Question c.....................................................................................................................3
Question d.....................................................................................................................4
Assignment 2....................................................................................................................4
Question a.....................................................................................................................4
Question b.....................................................................................................................6
Assignment 3....................................................................................................................6
Question a.....................................................................................................................6
Question b.....................................................................................................................6
References.........................................................................................................................8

Valuation
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Assignment 1:
Question a:
Calculation of value of firm
Cost of equity = 10.00%
Market value of equity = 750
Market value of debt = 500
After-tax interest rate on debt = 5.00%
Debt/Capital ratio = 0.4
Cost of capital = 8.00%
Cash flow to firm = $100.00
Value of firm= $1,250.00
Question b:
Calculation of value of equity
Cash flow to firm $100.00
- Interest (1-t) $25.00
= Cash flow to equity $75.00
Value of equity $750.00
Question c:
Cost of equity = 10.00%
Market value of equity = 850
Market value of debt = 500
After-tax interest rate on debt = 5.00%
Debt/Capital ratio = 0.37
Cost of capital = 8.15%
Cash flow to firm = $100.00
Value of firm= $1,227.27
Calculation of value of equity
Cash flow to firm $100.00
- Interest (1-t) $25.00
= Cash flow to equity $75.00

Valuation
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Value of equity $750.00
Question d:
In case of FCFF an FCFE valuation method, it is important for the business to not to
have depreciation and amortization expenses, capital expenditure and interest expenses in
order to compute and get the same amount of average cash flows of the business. These items
create differentiation in the cash flow of the business and affect the valuation process of the
business (Gibson, 2011).
Assignment 2:
Question a:
FCFE valuation model
2015 2016 2017
Net income 26592.7 27445.8 31945.7
Add: Depreciation
& amortization 0 0
Add: Changes in
WC 911.8 5249.7
Add: CAPEX 11042 10458
Add: Net
borrowings 6808 7162
46207.6 54815.4 Average =50511.5
Present value of discrete cash flows for next 10
years
Year
FCFF
($'000)
PVF
@10%
PV of
Cash
Flows
1 53,037.08 0.909
48,21
5.52
2 55,688.93 0.826
46,02
3.91
3 58,473.38 0.751
43,93
1.91
4 61,397.04 0.683
41,93
5.01
5 40,02

Valuation
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64,466.90 0.621 8.87
6 67,690.24 0.564
38,20
9.38
7 71,074.75 0.513
36,47
2.59
8 74,628.49 0.467
34,81
4.74
9 78,359.92 0.424
33,23
2.25
10 82,277.91 0.386
31,72
1.70
Total
394,58
5.87
Assumptions: It has been estimated that the cost of capital of the business is 6%.
FCFE valuation model
2015 2016 2017
EBIT 44321.1 45743 53242.9
Tax rate 17728.4 18297.2 21297.2
EAT 26592.7 27445.8 31945.7
ADD: Noncash
charges 0 0
Add: Changes in
WWC 911.8 5249.7
Less: Capital
expenditure 11042 10458
81355.8 101277.5 91316.65
Present value of discrete cash flows for next 10 years
Year
FCFF
($'000)
PVF
@10%
PV of Cash
Flows
1 95,882.48 0.909
87,165.8
9
2 100,676.61 0.826
83,203.8
1
3 105,710.44 0.751
79,421.8
2
4 110,995.96 0.683
75,811.7
3

Valuation
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5 116,545.76 0.621
72,365.7
5
6 122,373.04 0.564
69,076.3
9
7 128,491.70 0.513
65,936.5
6
8 134,916.28 0.467
62,939.4
4
9 141,662.10 0.424
60,078.5
6
10 148,745.20 0.386
57,347.7
1
Total
713,347.6
6
Question b:
The computation in question a explains that the value of equity in both the methods,
FCFF and FCFE is different because of the changes in the depreciation and amortization
expenses, capital expenditure and interest expenses of the business. These factors have
affected the total value of equity of the business (Higgins, 2012).
Assignment 3:
Question a:
Cost of Equity: CAPM model
A. Risk free rate 3.20%
B. Market rate of return 5.40%
C. Beta 1.3
D. CAPM 6.06%
Question b:
Valuation of equity taking free cash flows of firm
Past average
FCFF ($'000) 5.00
Growth rate 20.00%
Applied for next 10
years
Perpetual growth
rate 4.00% Applied after 10 years

Valuation
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Estimated Free cash flows for firm
Year FCFF ($' M) Remarks
2018 6.00 =5*(1+20%)
2019 7.20
2020 7.49
2021 7.79
2022 8.10
2023 8.42
2024 8.76
2025 9.11
2026 9.47
2027 9.85
Terminal cash
flows 10.25 =9.85*(1+4%)
Present value of discrete cash flows for next 10 years
Year FCFF ($'000) PVF @6.06% PV of Cash Flows
1 6.00 0.943 5.66
2 7.20 0.889 6.40
3 7.49 0.838 6.28
4 7.79 0.790 6.15
5 8.10 0.745 6.03
6 8.42 0.703 5.92
7 8.76 0.662 5.80
8 9.11 0.625 5.69
9 9.47 0.589 5.58
10 9.85 0.555 5.47
Total 58.99
Present value of terminal cash flows
Terminal cash
flows 10.25 73.51
Total firm value 132.50
Less: Value of Debt 10.00
Total value of Equity 122.50
No of Shares Outstanding 10.00

Valuation
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Per share value of value of equity (intrinsic value) 12.25

Valuation
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References:
Gibson, C. H. (2011). Financial reporting and analysis. South-Western Cengage Learning.
Higgins, R. C. (2012). Analysis for financial management. McGraw-Hill/Irwin.