Assignment 2

Topic: Analysing the investment decisions using Discounted Cash Flow

(DCF) method

Sub: Advance Corporate Finance, MFMC 0111

Course: MBA-FMB, III Trimester, I Year

Session: 2024-25

Submitted by: Submitted to:

Group No. 6 Dr.Rajesh Kumar
Krishna Sinsinwar-2484130028 Assistant Professor
Shivani Bharanger-2484130043
Shristi Singh-2484130044
Vedhanshi Sharma-2484130052

Institute of Business Management, GLA University, Mathura

1. Application of DCF Model & FCFF

Explanation
The Discounted Cash Flow (DCF) model is a fundamental valuation method used to determine
the intrinsic value of a business based on its expected future cash flows. This model discounts
projected cash flows back to their present value using a discount rate that reflects the risk of
those cash flows.

Free Cash Flow to the Firm (FCFF) represents the cash flows available to all capital
providers—both equity holders and debt holders—after accounting for operating expenses and
reinvestment needs. FCFF is preferred in DCF analysis when valuing the overall firm
(enterprise value) rather than just equity.
The standard formula for FCFF is:

FCFF = EBIT (1 - Tax Rate) + Depreciation - Capex - Change in Working Capital

These FCFF values are then discounted using the Weighted Average Cost of Capital (WACC)
to obtain the enterprise value.
Sol 1.
Calculation of ULFCF 2024 2025 2026 2027 2028
EBITDA 800000 1000000 1200000 1490000 1660000
EBIT 750000 950000 1150000 1440000 1610000
EBIT(1-t) EAT 525000 665000 805000 1008000 1127000
Depreciation 35000 35000 35000 35000 35000
Amortisation 15000 15000 15000 15000 15000
NWC -10000 -12000 -18000 -20000 -23000
(-) Capex -15000 -15000 -20000 -22000 -24000
Total ULFCF 550000 688000 817000 1016000 1130000
Discount rate 10% 10% 10% 10%
Present Value of ULFCF 625454.5 675206.6 763335.8 21572727.3
Total present value of
ULFCF 23636724.3

Interpretation
The DCF model was applied systematically by forecasting Free Cash Flows for the period 2024
to 2028. Key drivers such as revenues, operating costs, depreciation, and working capital
changes were considered carefully. The FCFFs were appropriately discounted at the
determined WACC rate to reflect the time value of money.

This methodology ensures a clear and comprehensive assessment of the firm's ability to
generate value. The detailed breakdown of assumptions in the projection allows for a
transparent and logical valuation process.

2.Calculation & Interpretation of Terminal Value

Explanation
Terminal Value (TV) captures the value of the firm beyond the explicit forecast period,
typically using either the Gordon Growth Model or the Exit Multiple Method:

• Gordon Growth Model: TV = FCFF_final year × (1 + g) / (WACC

 Exit Multiple Method: TV = EBITDA_final year × Exit Multiple

The Gordon Growth Model assumes a perpetual, stable growth rate for cash flows, whereas the
Exit Multiple Method estimates value based on comparable industry multiples.

Sol. To Q. No 1 Calculation of TV using perpetuity

Approach

TV= last yr ULFCF(1+G)/(WACC-G)

23730000
Present Value of TV= Cash inflow /(1+discount rate . WACC ,i)^t
16207909.3
EV (Enterprise value) without Debt & cash= total present value of ULFCF + Present value of TV
34479815.6
EV(Enterprise Value ) Without Debt & Cash -Debt
Now, EV with the treatment of Debt & Cash= +Cash
EV(Ans.1) 34627868.6
Equity Share Price per unit 5327.36

Interpretation
The terminal value was calculated using both the perpetuity growth approach and the EBITDA
exit multiple method. This dual-method analysis strengthens the reliability of the valuation by
cross-validating results from intrinsic and market-based perspectives.

Using a stable growth assumption aligns with firms operating in mature industries, while the
EBITDA multiple approach benchmarks the firm's valuation against industry norms, offering
a practical market view.

2. Assessment of Enterprise Value (EV)

Explanation
Enterprise Value (EV) represents the total value of a company’s operating assets available to
all investors. It is calculated by summing the present value of forecasted FCFF and the present
of the Terminal Value:
EV = Σ [FCFF_t / (1 + WACC)^t] + [TV / (1 + WACC)^n]

Subsequently, Net Debt is deducted from EV to determine the Equity Value available to
shareholders.
Sol(2)
Calculate the value of firm using EBITDA Multiple
approach

EBITDA multiple 9.0x

Last yr value 1660000
TV( under EBITDA Multiple) 14940000
Present value of TV 10204405
EV without the treatment of Debt and Cash 44684220.6
EV with the treatment of debt and cash( Ans .2) 44832273.6

Equity share price per unit ( Ans. 2) 68972.65

Interpretation
By appropriately discounting both the forecasted FCFF and Terminal Value, a robust Enterprise
Value estimate was achieved. Adjusting for net debt provides a realistic measure of shareholder
value.

The methodology effectively captures both operational efficiency and capital structure. The
sequential buildup from FCFF to EV and finally to Equity Value highlights the logical flow of
valuation and demonstrates financial rigor.

3. Comparison of Investment Opportunities using Valuation Methods

Explanation
To assess and compare investment opportunities, two primary valuation methods were applied:

• DCF-Based Valuation using a Perpetuity Growth Model: Emphasizes intrinsic firm value
based on internal projections.
• EBITDA Multiple Valuation: Reflects relative market-based valuation based on industry
comparables.Each method offers a distinct perspective, helping balance internal growth
assumptions with external market benchmarks.
Conclusion
The Discounted Cash Flow (DCF) and Free Cash Flow to Firm (FCFF) analyses are
fundamental tools in modern financial valuation, offering a structured and detailed approach to
assessing the true worth of investment opportunities. By projecting future cash flows and
appropriately discounting them, these models provide deep insights into a company's intrinsic
value beyond market perceptions. Incorporating methods like Terminal Value estimation and
Enterprise Value calculation ensures a comprehensive understanding of a firm's financial health
and growth potential. Additionally, adjusting for Net Debt and applying relative valuation
techniques enhances the accuracy and reliability of investment evaluations. Overall, mastering
DCF and FCFF methodologies equips analysts and investors with critical skills needed to make
informed, data-driven investment decisions in today's complex financial landscape.