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4.1 Stock Price

Course video 14 of 15

You can forecast the firm's free cash flow and wrap up this course with review lecture.

Valuation for Startups Using Discounted Cash Flows Approach

Universidade Yonsei

Curso 1 de 5 no Valuation and Financial Analysis For Startups Programa de cursos integrados

Discounted cash flow method means that we can find firm value by discounting future cash flows of a firm. That is, firm value is present value of cash flows a firm generates in the future. In order to understand the meaning of present value, we are going to discuss time value of money, first. That is, the value of $100 today is different from the value of $100 a year later. Then, what should be the present value of $100 that you are going to receive in 1 year? How about the value of $100 dollars that you are going to receive every year for next 10 years? How about forever? After taking this course, you are going to be able to find the present value of these types of cash flows in the future. Unlike most of finance courses, in this course, you are going to learn how to use excel to find present value of future cash flows. In addition to the present value, you are also going to learn how to find future value given investment; interest rate given investment and future cash flows, payments given interest rates, number of periods to wait given investment and interest rate, and so on. After learning the concept and how to find the time value of money, you are going to apply this to real world examples and company valuation. After taking this course, you will be ready to make an estimate of firm value by discounting its cash flows in the future.

Visualizar o programa do curso

Habilidades que você aprenderá

Discounted Cash Flow, Enterprise Value, Bond Valuation, Present Value

Ministrado por

Hyun Han Shin
Professor

Transcrição

Given the firm's weighted average cost of capital, we implement the discounted

free cash flow model in much the same way we did with the bond valuation.

That is, we forecast the firm's free cash flow up to some horizon

to get the terminal value of the enterprise.

The firm's free cash flow up to some horizon is similar to

coupons until the maturity date.

The firms terminal value is similar to the face value of the bond.

However, unlike cash flows from a bond,

free cash flows are not the same from period to period.

And terminal value is not $1,000, like bond face value.

Next, let's learn how to estimate the free cash flows of Yonsei Corporation.

Yonsei Corporation had sales of $500 million in 2015.

Suppose you expect its sales to grow at a 9% rate in 2016.

But at this growth rate, will slow by 1% per year for

long-term growth rate for

the education industry of 4% by 2021.

Based on Yonsei Corporation's past profitability and

investment needs, you expect EBIT to be 10% of sales.

Increases in net working capital requirements to 9% of any

increase in sales.

And net investment, which is capital expenditures in excess of depreciation,

to be 8% of any increase in sales.

Its tax rate is 40% and the weighted average of cost of capital is 12%.

Open your Excel template provided it in this class.

First of all, 2016 sales is $500 million

x 1 + sales growth rate of 9%.

So it is $545 million.

2017 sales growth rate is 1% lower than

2016 growth rate of 9%, which is 8%.

2017 sales is 2016 sales times

1 + 2017 sales growth rate.

Then 2017 sales is $588.6 million.

Now you can copy and paste the growth rate and

sales cells up to year 2021.

Sales growth rate in 2021 is 4%.

It is long-term growth rate.

Next, based on the assumption of this example, EBIT is 10% of sales.

Multiply $545 million by 10%,

which is $54.5 million.

Select the cell and then drag the field handle across the cells up to year 2021.

Next, Income Tax is 40% of EBIT,

which is 21.8. And drag the cells.

Then you can estimate the rest of the period.

Net investment is 8% of change in sales.

2016 change in sales is 545 minus 500,

or 500 times 2016 sales growth rate of 9%.

Multiply this number by 8%,

which is 3.6.

You can do the same for the rest of the estimation period.

Increase in net working capital is 9% of change in sales.

So 2016 increase in net working capital

is $45 million times 9%, which is $4.1 million.

You can do the same for the rest of the estimation period.

Now you can get Free Cash Flow.

FCF is equal to EBIT minus tax minus net

investment minus increasing net working capital.

For example, 2016 free cash flow is

54.5 minus 21.8 minus 3.6

minus 4.05 is equal to 25.1.

You can do the same calculation for the rest of this estimation.

2021 terminal value is present value of 2022 free cash flow,

with a permanent growth rate of 4%, discounted at 12%.

2022 free cash flow is (1 + 4%) times

$39 million, which is 2021 free cash flow.

And this 2022 free cash flow is assumed to grow at 4% permanently.

Then present value is 2022 free cash flow / (12%- 4%),

which is $506.7 million.

As you may have noticed, this is a growing perpetuity.

So we can use the present value formula for

growing perpetuities that you learned in the previous class.

In order to find the present value of total free cash flows,

we need to find the total cash flow of each year,

which is free cash flow plus terminal value.

Lastly, we can find the present value of each total free cash flow separately,

as we did in the previous class.

However, these cash flows are multiple cash flows.

So we can use NPV function to find the present value of the total free cash flow.

And this is much easier.

In NPV function, the first variable is discount rate.

So type in cost of capital, 12%.

The second variable is cash flows.

Therefore, the present value of total free cash flows for

Yonsei Corporation is $385 million.

This is exactly same as we

got the free cash flows of Yonsei Corporation the previous class.

Next, if Yonsei Corporation has $100 million in cash,

$50 million in debt, 20 million shares outstanding.

What is your estimate of the value of Yonsei Corporation's stock in early 2016?

Enterprise value is $385 million.

In order to find the value to equity holders,

you have to add $100 million of cash to the enterprise value and

subtract $50 million from the enterprise value.

Next, you have to divide $435

million by 20 million shares to get the price per share.

From this calculation, our estimate of the stock price of

Yonsei Corporation in early 2016 is $21.75.

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