1. The first step in doing DCF valuation is to understand the value drivers of the company in order to see whether the management projections are solid and then we adjust some of them with our reasonable assumptions. 2. Based on the assumptions, we can project the capital cash flows (CCF). CCFs measure all of the post-tax cash generated by the assets, then the cash flows include all of the cash available to capital providers, including the interest tax shields. 3. As the interest tax shields are included in the cash flows, the appropriate discount rate (r 0 ) is pre-tax and corresponds to the riskiness of the assets. --> r 0 = r f + β A * (r M - r f ) 4. Terminal Value can be calculated using the Cash- Flow-in Perpetuity. There are two required inputs, which are a cash flow of the last forecasted year and a future growth rate to infinity (“Perpetual Growth Rate”). --> Terminal Value = ( Last Year Cash Flow )∗( 1+Perpetual GrowthRate) ( Cost −of Capital – Perpetual Growth Rate) 5. The projected CCFs and the terminal value are discounted back by r 0 to the present. The summation of these two discounted values is the enterprise value. Note: The value of Yellow Book USA must be converted from US Dollar to Pound Sterling.
1. The first step in doing DCF valuation is to understand the
value drivers of the company in order to see whether the management
projections are solid and then we adjust some of them with our
reasonable assumptions.2. Based on the assumptions, we can project
the capital cash flows (CCF). CCFs measure all of the post-tax cash
generated by the assets, then the cash flows include all of the
cash available to capital providers, including the interest tax
shields.3. As the interest tax shields are included in the cash
flows, the appropriate discount rate (r0) is pre-tax and
corresponds to the riskiness of the assets. --> r0 = rf + A *
(rM - rf)4. Terminal Value can be calculated using the Cash-Flow-in
Perpetuity. There are two required inputs, which are a cash flow of
the last forecasted year and a future growth rate to infinity
(Perpetual Growth Rate). --> Terminal Value = 5. The projected
CCFs and the terminal value are discounted back by r0 to the
present. The summation of these two discounted values is the
enterprise value. Note: The value of Yellow Book USA must be
converted from US Dollar to Pound Sterling.
