The Module 6 course project assignment let’s you explore the company-level valuation, combining many aspects of the entire course into one activity. The requirements of the assignment are as follows:
You will use the Discounted Cash Flow (DCF) valuation model to calculate the intrinsic value of your chosen company. This model involves three primary steps: i) calculating the company’s cost of capital, ii) calculating the free cash flows to the firm, and ii) applying the time-value-of-money concept to discount your projected cash flow values back to the present using the company’s cost of capital as the discount rate.
- Calculating the Cost of Capital:
- The company’s cost of capital can be calculated using the Weighted Average Cost of Capital (WACC) formula:
WACC = D/V * eD *(1-Tc) + E/V * rE
- Using the website, ThatsWACC (www.thatswacc.com), enter your company’s “ticker symbol”, identify the relevant terms from above and calculate the WACC (please show your calculations).
- Calculating Free Cash Flow to the Firm:
- Estimate the free cash flows available to the firm (“FCFF”). To do this we can use the below formula:
FCFF = Cash Flow from Operations – Capital Expenditures + Interest * (1 – Tax Rate)
- The Cash Flow from Operations and Capital Expenditures can be found on the Statement of Cash Flows in Yahoo! Finance.
- The Interest expense (if any exists) is on the Income Statement.
- The Tax Rate is the one you used to calculate the WACC, above.
- For additional details on these calculations please refer to this external resource.
- Calculating Firm Value:
- You can now combine the two items above to estimate a present value of the firm. To simplify this calculation you should assume a constant growth rate of 3% in the Free Cash Flows to the Firm and apply the constant growth model:
Firm Value = FCFF * (1+g) / (WACC – g)
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