Essay on How to solve valuation problems

Submitted By gkbhai
Words: 531
Pages: 3

Question 1-a
Calculation of the free cash flow for each year in the following 5 years using:
FCF=OCF-NCS-ΔNWC = EBIT (1-tax rate)+ Depreciation-NCS-ΔNWC

Calculation of Free Cash Flow in $ Million

2013
2014
2015
2016
2017
EBITDA
530.40
549.74
567.77
584.25
598.95
Less Depreciation
60.00
60.00
60.00
60.00
60.00
EBIT
470.40
489.74
507.77
524.25
538.95
Less Interest
50.00
50.00
50.00
50.00
50.00
EBT
420.40
439.74
457.77
474.25
488.95
Less Tax
126.12
131.92
137.33
142.27
146.68
EAT (Net Income)
294.28
307.82
320.44
331.97
342.26
NOPAT
329.28
342.82
355.44
366.97
377.26
Add Depreciation
60.00
60.00
60.00
60.00
60.00
Less Capita Expenditure
133.57
136.95
140.11
142.99
145.57
Less Changes in working Capital
0.00
0.00
0.00
0.00
0.00
Free Cash Flow
255.71
265.86
275.33
283.98
291.70
Earnings Per Share in Cents
58.856
61.56338
64.08747
66.39462
68.45286
Dividends Per Share in Cents
44.142
46.17253
48.06561
49.79597
51.33964
Growth Rate in Earning Per Share
0.051
0.046
0.041
0.036
0.031

From 2013, every year’s data is calculated depending on the previous year. So, we take 2013’s data as an example. Firstly, we need to estimate the net income and then from bottom to top to calculate EBIT. Since growth rate of earning per share in 2013, is 5.1% and the earning per share in 2012 was 56 cents. So, the earning per share in 2013 is 56(1+5.1%) = 58.856 cents.

Given that the firm has 500 million shares outstanding, the net income2013 = (500×earning per share)/100 = 294.28 million dollars. The tax rate is given by 30%, the depreciation, EBITDA-EBIT=60 million, will remain unchanged for following years, so the EBIT 2013 = (Net income) / (1-0.3) + 60+50 = 470.4 in million.

Then, EBIT (1 – tax rate) = 329.28 in million (2013’s data).

The capital expenditure each year equals to the depreciation expense plus the reinvested earnings. The net capital spending = depreciation + reinvested earnings. Since the company has no intention to change its dividend payout ratio, Dividend per share/Earning per share=0.75,…