Finance Assignment: Discounted Cash Flow and Free Cash Flow Valuation

This document provides a solution to a finance assignment focusing on discounted cash flow (DCF) and free cash flow (FCF) valuation methods. The assignment analyzes the enterprise value of General Mills, Inc. under two scenarios, demonstrating the impact of revenue growth on valuation. The solution calculates present values, terminal values, and the weighted average cost of capital (WACC). Additionally, it covers the calculation of free cash flow to the firm (FCFF) for Kimberly-Clark Corporation using Method 2, and explores the impact of treating net interest payments as either operating or non-operating expenses. The document offers a detailed breakdown of the calculations and interpretations, illustrating how these financial metrics are used to assess a company's financial health and potential for shareholder returns. This assignment provides valuable insights into financial modeling and valuation techniques.

Finance

Chapter 4: A Discounted Cash Flow Valuation: General Mills, Inc. (10 marks)
First scenario
Year 2010 2011 2012 2013 2014
Net cash flow from
operations 2107 2107 2107 2107 2107
Discounting factor @ 10% 0.911 0.830 0.756 0.688 0.627
PV of cash flows 1,919 1,748 1,592 1,450 1,321
Terminal Value
Sum of PV of FCF for explicit
forecast 8,030
WACC 9.79%
Long term growth in Revenues 0%
Present Value of terminal value 8,458
Terminal Value as % of Total Value 51%
Equity Value
Enterprise
Value 16,488
Second scenario: when cash flow from operation will increase by 3%
Year 2010 2011 2012 2013 2014
Net cash flow from
operations 2170 2235 2302 2371 2443
Discounting factor @ 10% 0.911 0.830 0.756 0.688 0.627
PV of cash flows 1,977 1,854 1,740 1,632 1,531
Terminal Value
Sum of PV of FCF for explicit
forecast 8,734
WACC 9.79%
Long term growth in Revenues 0%
Present Value of terminal value 9,805
Terminal Value as % of Total Value 53%
Equity Value

Enterprise
Value 18,539
Interpretation: The above depicted table shows that enterprise value will be higher
when sales revenue increases by 3% every year. Thus, for enhancing value firm needs to
make focus on sales enhancement.
Chapter 11: Free Cash Flow for Kimberly-Clark Corporation (10 marks)
1. Calculate free cash flow using Method 2.
Method 2
FCFF = Cash flow from Operations – Net Investment in Long Term Assets + Interest
Expense (1-Tax Rate)
FCFF = 2429 – 842 + 142.4 (1- .37)
= 1676.71 million
Considering above calculation, it can be depicted that $1676.61 million are available
to company for distributing among shareholders in the form dividend and other activities.
2.
When net interest payment is considered as non-operating expense
Free cash flow: Cash flow from operating activities – capital expenses
= $1539.99 - ($898 - $56)
= $697.99 million
Net cash flow from operations after tax: 2429 – (2429 * 36.6%)
= $1539.99
Or
When net interest payment is considered as operating expense
FCF: ($2429 - $142.4) - ($898 - $56)
= $1449.70 - $842
= $607.70 million
Net cash flow from operations after tax: 2286.6 – (2429 * 36.6%)
= $1449.70 million