Somesh Katre's Business Plan - Solved
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The document compares approaches to equity valuation using free cash flow to the firm (FCFF) and free cash flow to equity (FCFE). FCFF considers cash flow available to all capital providers, while FCFE looks at cash flow to common equity holders. The document provides examples of discounting FCFF using the weighted average cost of capital (WACC) and FCFE using the required return on equity to determine equity value. It recommends using FCFF with WACC for valuation as the net present value is positive.
Somesh Katre's Business Plan - Solved
- 1. Submitted By: Rajagiri Centre For Business Studies
- 2. Objective To arrive at best possible cash flow using Free Cash Flow to Firm, Free Cash Flow to Equity, and Capital Cash Flow Measurement of cost of capital. Valuation of a project.
- 3. FCFF vs. FCFE Approaches to Equity Valuation Equity Value FCFE Discounted at Required Equity Return FCFF Discounted at WACC Debt Value
- 4. FREE CASH FLOW TO FIRM (FCFF) Measure of financial performance that expresses the net amount of cash that is generated for the firm, consisting of expenses, taxes and changes in net working capital and investments. FCFF = Operating Cash Flow- Expenses- Taxes- Changes to NWC- Changes in Investments
- 5. VALUATION USING FCFF Year 0 1 2 3 4 5 FCFF 250.00 310.00 rwacc Value of Project 11.66% 11.68% 4639.53 4871.50 1700.00 1785.00 2939.53 3086.50 3458.09 Debt Value of Equity rw acc, year 5 E year 4 E year 4 D year 4 re, year 5 D year 4 D year 4 D year 4 rdebt 1 Tc
- 6. FREE CASH FLOW TO EQUITY(FCFE) Shows how much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment. FCFE= Net Income- Net Capital Expenditure- Change in Working Capital + New Debt- Debt Repayment
- 7. VALUATION USING FCFE Year 0 2 3 4 5 78.00 135.90 193.80 251.70 309.60 16.38% 16.34% 2730.00 2866.5 1700.00 FCFE 1 1785.00 4430.00 4651.50 re Value of Equity Debt Value of Project re , yea r 5 3286.92 ru n levered D yea r 4 E yea r 4 1 Tc ru n levered rd eb t
- 8. CAPITAL CASH FLOW (CCF) Movement of money for the purpose of investment, trade or business production. Occurs within corporations in the form of investment capital and capital spending on operations and research & development. Measure the cash flows accruing to both equity holders and bond holders. CCF = Free cash flow to equity + Cash Flow to Debt holders
- 9. VALUATION USING CCF Year 0 1 2 3 4 5 282.20 343.60 12.75% 12.76% 4430.00 4651.50 Debt 1700.00 1785.00 Value of Equity 2730.00 2866.50 CCF rccf Value of Project rccf 3286.92 E E D re D E D rdebt
- 10. FCFF Using E r D r WACC rwacc(modified) Year mv e Emv 0 FCFF 1 Dbv .ractual .T Dmv 2 3 4 5 70.00 130.00 190.00 250.00 310.00 rwacc, modified Value of Project mv debt 11.98% 12.00% 3286.92 4430.00 4651.50 Debt 1700.00 1785.00 Value of Equity 2730.00 2866.50
- 11. VALUATION USING FCFF - WACC NPV is showing positive value in FCFF using WACC. Firms in practice set their target capital structure in terms of book values. The book value information can be easily derived from the published sources. The book value debt-equity ratios are analyzed by investors to evaluate the risk of the firms in practice.
- 12. SUMMARY FCFF vs. FCFE FCFF = Cash flow available to all firm capital providers FCFE = Cash flow available to common equityholders FCFF is preferred when FCFE is negative or when capital structure is unstable Equity Valuation with FCFF & FCFE Discount FCFF with WACC Discount FCFE with required return on equity Equity value = PV(FCFF) Debt value or PV(FCFE)
- 13. RECOMMENDATION NPV is positive, so its better to select FCFF using WACC. Calculated using estimated forecasted value. We suggest FCFF using WACC method is appropriate for Somesh Katres Business Plan.