Basics of DCF

D
Valuation
Wh t How,
What,
H
Whys
Wh off DCF

Valuing OLP
OLP
Expected EBIT = Rs. 250 millio
on.
Market Value of Debt (also equ
ual to its book value) = Rs.500 million
Cost of debt (also equal to the coupon rate) = 10%
Tax rate = 30%
Cost of equityy = 20%
Projected growth rate = 0
Capex = Depreciation
Increase in Working Capital = 0
What is its equity value?
(
no excess cash with OLP)
What is the enterprise value? (Assume

Two Methods of C
Company Valuation
Value Equity Directly
Discount equity cash flows witth cost of equity

Value the company directly

Discount free cash flow at the weighted average cost of capital

Discount capital cash flow at tthe cost of capital (without tax adjustment in cost of debt)

Circularity Proble
em

Adjusted Presentt Value Method

Finding Unlevere
ed Cost of Equity

Introducing Grow
wth
Lets assume that OLP will grow at 5% pa.

Lets also assume that the net investment (investment in fixed assets and workin
capital
it l over and
d above
b
d
depreciation)
i ti ) iis Rs.
R 30 million
illi ffor th
the nextt year.

ar 0. The projected cash flows are expected to com

Today, we are at the end of yea
at the end of year 1.
The debt (as of today) is Rs.50
00 million.
Kd = 10%
Ke = 20%
Tax Rate = 30%
Expected EBIT = Rs.250 millio
on

Introducing Grow
wth

Year 0

ebt = Rs.500 Million

ash = 0
l dividends for the last year
ready paid.

Year 1
Pro
ojected EBIT = Rs.250 million
Nett Investment = Rs.30
Rs 30 million

Growth rate (g) = 5% from

onwards
d

Possible Financin
ng Assumptions
Debt (in Rupee value remains constant).
This is the MM assumption.

Debt-Equity ratio remains consstant in market value terms.

Debt keeps changing for some
e time period and then either the debt remains
constant (in rupee value) or the
e debt ratio (debt to market value of the company)
remains constant.