Ratio Analysis
Valuations
Charting Technique
- This method enables the user to define absolute value of the company
- It is the process of SUM of FUTURE CASHFLOWS, which is discounted at a particular rate
- FCFF: Free Cashflow to Firm
- FCFE: Free Cashflow to Equity
- Free CashFlow doesn't mean as NET INCOME
- It represents to CASH available for distribution to:
- Creditors
- Share holders
- Through this method we can evaluate the Investment Projects
- It is one of the method of valuation, which is very useful to value a company
- All the Futured\Expected cash inflows are discounted with particular rate
- In other words PROJECTING future cash flows and discount to PRESENT VALUES
- Calcuate Free Cashflow
- Calculate the Discount Rate
- 1)Project future CASH FLOW based on assumptions
- 2)Calculate Discount Rate through WACC method
- Weighted Average Cost of Capital
- The weighted average cost of capital
- Free Cashflows
- Terminal Value
- Enterprise Value
- Equity Value
- DCF Analysis entirely depended on PROJECTED NUMBERS
- It is nothing but amount not required to operations of the company
- Company can pay that amount in form of dividends to investors (or) Reinvest into business
- It entirely depends on company's discretion
- FCFF: Free Cashflow to Firm
- FCFE: Free Cashflow to Equity
- While calculating terminal value consider last projecting value., assuming company attains same level of profit through out the life
- Firm value vary from one analyst to another as they are approching different assumptions
- Determine Forecasting periods for projections and REVENUE growth
- Deduct the all the Cash Expendses
- It should be projected based on HISTORIC OPERATING COST MARGINS
- Consider based on latest applicable rates only
- High Working Cap results Low cash flows
- Forecast the working Capital based on growth in Sales
- Working Capital having proportional relationship with Sales
- Identify the Discount Rate through WACC:
Discounted Cashflow Model(DCF)
Valuation Methods
Free Cashflow method we can classify in two types
What is FREE CASHFLOW?
Discounted Cashflow Method
Steps to Follow:
Cost of Equity
Cost of Equity = Risk-Free Rate + Beta * Equity Risk Premium
Discount Rate:
We can retrieve discount rate through two methods:
Steps to follow to conclude DCF Value:
Points to Remember
Free Cash Flow:
Example: Valuation of Firm and Equity through DCF ANALYSIS:
Calcualtion Procedure between FCFF & FCFE:
Why we need to discount future Cashflows?
Step1:
Step2:
Projection of OPERATING COSTS:
Taxes:
Working Cap:
Calculating Net Present Value of Future Cashflows