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:
- Calculate the Intrinsic Value of Your Company:
You will use the Discounted Cash Flow (DC) 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 (WACK) formula:
WACK = D/V * ed *(1-Tc) + E/V * re
- Using the website, Thatcher (WWW.Thatcher.com), enter your company’s “ticker symbol”, identify the relevant terms from above and calculate the WACK (please show your calculations).
- Calculating Free Cash Flow to the Firm:
- Estimate the free cash flows available to the firm (“FAFF”). To do this we can use the below formula:
FAFF = 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 WACK, 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 = FAFF * (1+g) / (WACK – g)
- Comparison to Market Capitalization:
- On the Key Statistics page in Yahoo! Finance identify and indicate the Market Capitalization (“market cap”). What does this value represent?
- Compare the market cap to your calculated value.
- To compare the market cap from Yahoo! Finance to the firm value you calculated in the previous section above you need to first subtract the value of the debt from your firm value calculation.
- How does your intrinsic value (less debt) compare to the market cap of the company on Yahoo! Finance?
- What might account for any differences between these two values?
- Paper Mechanics should be as follows:
- There is no minimum page length requirement for this paper.
- The paper should be in SPA format (i.e. cover page, double-spaced, 12 pt font, reference section at end, etc.).
- The paper should include at least 1 source, such as the annual report, Yahoo! Finance or Gog.