Lectures 3-4 DCF Flashcards
What does leverage create?
Leverage magnifies the volatility of accounting profitability. If there are taxes, it provides tax shields
ROE formula in a scenario with no taxes
ROE = ROI + D/E(ROI - i)
What leverage effects? And what are the two scenarios?
Leverage affects asset (enteprise value). If there are taxes it adds to enterprise value if there are not it is unchanged.
Calculation of FCFE?
EBIT
- Operating Tax (EBIT*tax)
+D&A
+- Change in NWC
- CAPEX
FCFO
- Interest payments
+ income from associates
+- exceptional items
+ value of tax shield
+- change in gross debt
+- change in surplus assets
FCFE
Required return to equity holders(with no leverage)?
Keu = rf + beta unlevered*MRP
Enterprise and Equity value in a no debt scenario?
EV = FCFO/Keu
EqV = EV
What happens to the required returns when there is debt?
Now there are two separate returns required by shareholders and by debtholders
Enterprise value in a company with debt scenario?
EV = FCFO/Keu + Debt*tax –> Adjusted Present Value
What is the debt value in a no-growth opportunity?
D = Market Value
What is the cost of levered equity?
What is EV?
What is EqV?
Kel = rf + Keu(D/E(keu-kd)*(1-t))
EqV = FCFE/Kel
EV = EqV + D
What happens when debt increases?
Keu becomes Kel as shareholders require bigger returns for the risk involved from leverage
What is the WACC formula?
WACC = Kel(E/E+D) + Kd(1-t)*[D/D+E]
What is the EV in a scenario of a company with significant debt? - asset side?
EV = FCFO/WACC <– DCF model asset side
EqV = EV - Debt
What is the EV in a scenario of a company with significant debt? - equity side?
EqV = FCFE/Kel
EV = Debt + EqV
What is the EV in a scenario of a company with significant debt? - APV?
EV = FCFO/Keu+ tD - D
What is the EV under a DCF - asset side model?
EV = Ξ(the sum) of FCFO/(1+WACC)^t+ TV/(1+WACC)^t
Discounting the different cash flows (usually 5 years) back to the present + the terminal value
Terminal value under DCF?
(FCFO*(1+g))/ WACC - g
where g = fcfo growth
What is the EqV under a DCF - equity side model?
EqV = Ξ(the sum) of FCFE/(1+Kel)^t + TV/(1+Kel)^t
TV = [FCFE*(1+g)]/(Kel - g)
EV = EqV + Debt
What is the APV with a DCF model?
It splits into two
- Ξ(the sum) of FCFO/(1+Keu)^t + TV/(1+Keu)^t
TV = FCFO*(1+g)/(Keu - g)
g = fcfo growth - Ξ(the sum) of Tax Shields/(1+Kts)^t + TV of tax shields/(1+Kts)^t
TV = TS*(1+g)/(Kts - g)
g = tax shield growth
Capital reinvestment rate?
This is the capital that gets reinvested back into the business.
1 - FCFO/NOPAT
can also be
growthNOPAT/ROI
This is a fundamental relationship: under constant returns (which is reasonable in the long term) the growth rate in earnings (g) should be equal to the product of the reinvestments into the business (CRR) and the return on these investments (ROI)
ROI?
NOPAT/Capital employed(t-1)
Terminal Value if ROI converges to WACC?
NOPAT(t+1)/WACC
Equity reinvestment rate?
1 - FCFE/Net Income
if ROE is constant
ERR = NetIncome/Equity t-1
ERR = G(err)/ROE
