Basics of DWh t H Wh f DCFWhat, How, Whys of DCF

DCF Valuation

Valuing OLPValuing OLP…

Expected EBIT = Rs. 250 millio Market Value of Debt (also equ Cost of debt (also equal to the Tax rate = 30% Cost of equity = 20%y Projected growth rate = 0 Capex = Depreciation Increase in Working Capital = 0 Increase in Working Capital = 0 What is its equity value? What is the enterprise value? (

on. ual to its book value) = Rs.500 millioncoupon rate) = 10%

00

(Assume no excess cash with OLP)

Two Methods of CTwo Methods of C

Value Equity Directly Discount equity cash flows wit

Value the company directly Discount free cash flow at the

Discount capital cash flow at tDiscount capital cash flow at t

Company ValuationCompany Valuation

th cost of equity

weighted average cost of capital

the cost of capital (without tax adjustment in cost of debt)the cost of capital (without tax adjustment in cost of debt)

Circularity ProbleCircularity Proble

emem

Adjusted PresentAdjusted Present

t Value Methodt Value Method

Finding UnlevereFinding Unlevere

ed Cost of Equityed Cost of Equity

Introducing GrowIntroducing Grow

Let’s assume that OLP will gro

Let’s also assume that the net it l d b dcapital over and above deprec

Today, we are at the end of yeaat the end of year 1.

The debt (as of today) is Rs.50

Kd = 10%

K = 20% Ke = 20%

Tax Rate = 30%

Expected EBIT = Rs.250 millio

wthwth

w at 5% pa.

investment (investment in fixed assets and workini ti ) i R 30 illi f th tiation) is Rs. 30 million for the next year.

ar 0. The projected cash flows are expected to com

00 million.

on

Introducing GrowIntroducing Grow

Year 0

ebt = Rs.500 Millionash = 0

ProNetash 0

l dividends for the last year ready paid.

Net

wthwth

Year 1

ojected EBIT = Rs.250 milliont Investment = Rs 30 milliont Investment = Rs.30 million

Growth rate (g) = 5% fromdonwards

Possible FinancinPossible Financin

Debt (in Rupee value remains This is the MM assumption.

Debt-Equity ratio remains cons

Debt keeps changing for someconstant (in rupee value) or theremains constant.

ng Assumptionsng Assumptions

constant).

stant in market value terms.

e time period and then either the debt remains e debt ratio (debt to market value of the company)