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Corporate Bridge Academy DCF APPLICATION ASIAN PAINTS

1.1
I. II.

STEP 1: CALCULATE FREE CASH FLOWS


Reference Net Income from Income Statement Add back non-cash expenses Depreciation Amortization Stock-based compensation Add back interest, as we are calculating the cash flows to the firm i.e. Debt-holders as well as Equity-holders not just the Equity-holders. Substract the projected Capital Expenditure required, as that amount would not be available to shareholders and would be used to fuel the growth of the company Also include the changes in working capital a. Substract the amount if there is an increase, as that additional amount would be blocked in working capital b. Add the amount if there is a decrease as compared to previous year, as that amount is freed out of working capital cycle and is available to shareholders.

III. IV. V.

Add them all to arrive at Free cash flow available to firm

After tax Interest Expense has not been projected as Google has no long-term debt

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1.2
I.

STEP 2: CALCULATE WACC


Apply CAPM to calculate the cost of Equity a. Assume a risk-free rate and market Premium

Valuation Assumptions Terminal growth rate Cost of debt Beta Risk free rate (rf ) Market Premium Cost of Equity
b. Take a value for beta

8.0% 5.0%

Taken as per Indian markets

c.

Calculate the Cost of Equity

Consensus Beta taken from Reuters

Apply CAPM Model to calculate the cost of Equity

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II.

Estimate the cost of Debt

Valuation Assumptions Terminal growth rate Cost of debt Beta Risk free rate (rf ) Market Premium Cost of Equity
III.

10.0% 0.5 8.0% 5.0% 10.35%


Cost of Debt assumed at 10%

Calculate Weighed Average Cost of Capital (WACC) a. Take the weighted average summation of cost of debt and cost of equity to calculate WACC

Debt and equity amount taken from Balance Sheet

Take the weighted average of the cost of debt and cost of equity to calculate WACC

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1.3

ESTIMATE TERMINAL VALUE

Terminal Growth rate assumed at 6%

Terminal Value

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1.4 STEP 4: DISCOUNT THE FREE CASH FLOWS

Use XNPV to calculate the Present Value

1.5

STEP 5: DISCOUNT THE TERMINAL VALUE TO PRESENT

1.6

ARRIVE AT THE ENTERPRISE VALUE

Enterprise Value

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1.7
I. II. III.

STEP 7: ADJUST ENTERPRISE VALUE TO ARRIVE AT EQUITY VALUE


Substract: Debt Substract: Minority interest Add: Cash and cash equivalents

Equity Value

1.8

STEP 8: CALCULATE THE FAIR VALUE

Asian Paints fair Price as per CB Research

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