Corporate Valuation

Question 1

what are the three methods to calculate a firms Enterprise value?

Answer 1

1. FCF method-levered (discount using WACC)
2. APV method-unlevered (discount using PretaxWACC) -> VL = Vu + PV(tax shield) <- find
3. FCFF(discount using cost of equity)

Question 2

What to remember when doing calculations?

Answer 2

• don’t include the first cash flow at time 0 when calculating a firms EV, only include cash flow at 0 when asked to calculate the NPV
• discount tax shield to PV using interest rate if the debt is pre-determined or fixed, otherwise use unlevered cost of capital rate
• interest expense per year= Interest rate x dn-1
• the tax shield = Interest expense x tax rate

Question 3

how do you calculate the debt capacity per year?

Answer 3

it is a portion of the levered firm value if the debt to equity ratio is constant.
* constant d/e ratio x Vl,at time t
this value is used to calculate interest expense

Question 4

How do you calculate FCFE?

Answer 4

• need to deduct onligations to debtholders after tax and adjust net borrowings
• net borrowings = opening- closing balance of previous debt capacity // d - dt-1
• FCFE = FCF - Interest expense (1-t) + Net borrowings

Question 5

How do you calculate FCF in general?

Answer 5

• calculate sales
• subtract COGS
• subtract other expenses (selling, marketing)
• subtract depreciation
• = EBIT
• subtract Income tax
• =Unlevered Net income
• add Depreciation
• subtract capital expenditure
• subtract change in NWC
• FCF