Determination of Free cash flows to firm

After tax operating earning

(+) Investments in long-term assets
(-) Investments in operating working capital
Operating free cash flows
(+) After tax non-operating income
(+) Decrease (minus increase) in non-operating assets
Free cash flows to firm
Continuing Value (Copeland et al8)
CV = FCFF/WACC - g

Problem 1
Step 1
Determination of WACC
Source of funds
Equity
10% Debt

Cost (%) Weights

12.00
6.50
total

Equity
10% Debt
WACC
Cost of Debt - Calculation
Ki
(1-t)
Kd

10
0.65
6.5

2008
0.14
0.86

2009
0.13
0.87

10
0.12
0.88

11
0.11
0.89

1.71
5.57
7.29

1.58
5.64
7.22

1.45
5.71
7.17

1.34
5.78
7.11

12
0.10
0.90

13
0.09
0.91

14
0.09
0.91

15
0.08
0.92

1.23
5.84
7.06

1.13
5.89
7.02

1.03
5.94
6.97

0.95
5.99
6.93

Equity
Debt
TOTAL

2008
100
600
700

2009
100
660
760

10
100
726
826

11
12
13
14
15
100
100
100
100
100
798.6 878.46 966.31 1062.9 1169.2
898.6 978.46 1066.3 1162.9 1269.2

Step 2
Determination of Depreciation (Yrs 1-8)

Year
1
2
3
4
5
6
7
8

Long-term assets at
the beg of yr
50.00
46.75
46.54
56.56
69.32
88.67
96.62
94.88

Additions during
the year
5.00
8.00
20.00
25.00
35.00
25.00
15.00
10.00

Total at the
year end
55.00
54.75
66.54
81.56
104.32
113.67
111.62
104.88

(RsLacs)
Depreciation
@15%
8.25
8.21
9.98
12.23
15.65
17.05
16.74
15.73

Balance
46.75
46.54
56.56
69.32
88.67
96.62
94.88
89.15

Year
625

1
2
3
4
5
6
7
8

Long-term assets at
the beg of yr
625
625
645
665
680
695
710
725

Additions during
the year
0
20
20
15
15
15
15
15

Total at the year

end
625
645
665
680
695
710
725
740

Depreciation
@8%
50
51.6
53.2
54.4
55.6
56.8
58
59.2
438.8

Step 3
Determination of Investment (Capital Expenditure + Current Assets) Required, years 1-8

Year

Investment required
Capital expenditure

1
2
3
4
5
6
7
8

Existing Invesments
in CA

5
8
20
25
35
25
15
10

CA (Sales * 0.2)
16
20
30
44
60
52
46
40

Total
21
28
50
69
95
77
61
50

20
16
20
30
44
60
52
46

red, years 1-8

(Rsmn)
Additional Investments
required

Nil
12
30
39
51
17
9
4

Sales

Year

80
100
150
220
300
260
230
200

1
2
3
4
5
6
7
8

Investment required
Capital
expenditure
CA
Total
20
20
20
10
30
20
11
31
15
12.1
27.1
15
13.31
28.31
15 7.3205 22.3205
15 7.68653 22.6865
15 8.07085 23.0709

Existing
Invesments in CA

Additional
Investments
required

Sales

1000
1100
1210
1331
1464.1
1537.305
1614.17025
1694.878763

Incremental sale

100
110
121
133.1
73.205
76.86525
80.7085125

Step 4
Determination of Present value for Explicit Period of Projections (yr 1-8)
Particulars
Sales Revenue
Less: Expenses
Variable costs
Fixed cash operating costs
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Depreciation
EBIT
Less: Taxes (30%)
NOPAT
Non-operating income
Gross cash Flow
(NOPAT+Depn+Non-Op income)
Less: Investment in (Capital exp+CA)
Free cash Flow
PV Factor (WACC - 13%)
PV of FCF
Total PV

1
1000

2
1100

3
1210

400
16
5
8.25
429.25
570.75
171.23
399.53
0.50

440
16
15
8.21
479.21
620.79
186.24
434.55
0.00

484
16
15
9.98
524.98
685.02
205.51
479.51
0.00

4
5
1331 1464.1

532.4
16
30
12.23
590.63
740.37
222.11
518.26
0.00

585.64
20
30
15.65
651.29
812.81
243.84
568.97
0.00

408.28 442.76 489.49 530.49 584.62

0.00 12.00 30.00 39.00 51.00
408.28 430.76 459.49 491.49 533.62
0.88
0.78
0.69
0.61
0.54
361.31 337.35 318.45 301.44 289.63
2433.48
1
1
1.13
0.88

1
2
1.28
0.78

1
3
1.44
0.69

1
4
1.63
0.61

1
5
1.84
0.54

(Rsmn)
6
7
8
1537.3 1614.2 1694.9

614.92
20
30
17.05
681.97
855.33
256.60
598.73
0.00

645.67
20
10
16.74
692.41
921.76
276.53
645.23
0.00

677.95
20
10
15.73
723.68
971.2
291.36
679.84
0.00

615.78 661.97 695.57

17.00
9.00
4.00
598.78 652.97 691.57
0.48
0.43
0.38
287.61 277.55 260.14

1
6
2.08
0.48

1
7
2.35
0.43

1
8
2.66
0.38

Particulars
Sales Revenue
COGS
Less: Expenses
Variable costs
Fixed cash operating costs
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Depreciation
EBIT
Less: Taxes (30%)
NOPAT
Non-operating income
Gross cash Flow
(NOPAT+Depn+Non-Op income)
Less: Investment in (Capital exp+CA)
Free cash Flow
PV Factor (WACC - 13%)
PV of FCF
Total PV

1
1000
600
150

50
400

2
1100
660

3
1210
726

4
5
6
7
8
1331 1464.1 1537.3 1614.2 1694.9
798.6 878.46 922.38 968.5 1016.9

157.5 165.38 173.64 182.33 191.44 201.01 211.07

51.6
440

53.2
484

54.4
55.6
56.8
58
59.2
532.4 585.64 614.92 645.67 677.95

Step 5
Determination of PV in respect of continuing value
CV = FCF9/(ko-g)
Calculation of CV
FCF 8
FCF 9
WACC (ko)
g
(ko-g)
CV
PV Factor
PV of CV

(Rsmn)
691.57
726.15
13%
5%
8%
9076.84
0.3762
3414.34

Step 6
Total value of the firm, based on DCF Approach
PV of Free cash flows during explicit period
PV of free cash flows after explicit period (CV)
Total value

(Rsmn)
2433.48
3414.34
5847.82

Step 7
Value of equity
Total value of firm
Less: value of debt
Value of equity

(Rsmn)
5847.82
80.00
5767.82