Introduction
This assignment is to analyse and discuss the use of Discounted Cash Flow "DCF" to value Henkel AG.
Discounted Cash Flow Valuation is based upon the notion that the value of an asset is the present value of the expected cash flows on that asset, discounted at a rate that reflects the riskiness of those cash flows. Specify whether the following statements about discounted cash flow valuation are true or false, assuming that all variables are constant except for the variable discussed (Rubinstein, 2003). As described by Emhjellen and Alaouze (2003), the discounted net cash flow is one of the most popular tool used for finance valuation.
The assignment will specifically discuss three key areas to DCF; Cost of Equity,
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The usual method of selling equity in a company is to sell shares of stocks. Selling equity provides the advantage that dividends will result on profitability. However, there 's huge advantage that shareholders will expect a continuous return on their investment and if any stock fail it will be sold off which in return will devaluate the company (Brigham and Ehrhardt, 2009).
Risk Free Rate
The risk free rate is defined as the return on a portfolio or security that has no covariance with the market. This is a highly used method for estimating the cost of equity capital. To estimate the risk free rate it’s important to consider government default-risk free bonds since government bonds come in many maturities. The risk free rate reflects three components; the rental rate, inflation, and maturity risk or investment rate risk which are all economic factors that are found in the yield to maturity for any given maturity length.
For Henkel AG risk free rate we will use a 10 year bond because it has the least risk. A longer bond give the company a bigger picture of the future, for example 3 to 6 years are not long enough, on the other hand 18 years are too long.
We will pick 3.38 because inflation needs time to be more established.
Calculation of Treasury Rate: (4.52 + 4.74) / 2 = 4.63
The above results is made by taking in account the rating of Hankel AG, while its rating A which is rated
Since different securities can have different payment period (for example, bond interest is paid semiannually but stock dividends are paid quarterly), direct comparisons can only be made when all yields are expressed as effective annual rates.
Although this investment class can be considered the most conservative of the three, the low yield of government bonds in the past 10 years does not lend a comparative metric against many other investment opportunities (Jacobs, 2012). The fixed rate of these instruments allows for a guaranteed return, but should only be utilized at a point in an investing cycle when risk is higher than potential income growth. The 25% allocation that is invested in this class is positioned to provide a long term guaranteed investment, with the possible that these lower rates will not rise significantly in the next few years.
Restaurant Risk-free rate of 8.72%; short-term rate used due to the short term usefulness of assets
57.14% 42.86% 35.71% 26.00% Duration of the perpetuity = 1.04/0.04 = 26 years Duration of the zero = 1 years 14 = (wz)(5) + (1 – wz)26; wz = 57.14% Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.
This would also indicate that HCA receives a lower rating. This could prove to be good and bad. In some instances, companies with lower ratings experience a rise in their cost of debt or loss access to the debt market. When Du Pont lost their AAA rating they did not experience any dramatic changes. With the growth rate at 15%, HCA has an opportunity to increase in the future. An ROE of 17.6% signifies efficiency and provides evidence that the company is heading in the right direction.
1. What is the definition of fair value according to ASC 820? Do you believe the discounted cash flow method is capable of computing an estimate that would be considered a reasonably reliable fair value for the patent held by Morris Mining? Why or why not?
I take the “Long –Term U.S. Government Bond Returns from 1926-1987” as appropriate risk free rate from Exhibit 4. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. “Long –Term U.S. Government Bond Returns from 1926-1987” are include the whole lifetime of Marriot and are more or less risk free.
This paper focuses on a company analysis of Molson Coors Brewing Company. The second part of the project will give a better understanding of the company by analyzing their stock price, total cost of
As discounted cash flow method assumes all equity financed acquisition, it presents more comparable value for the real option values shown. The value of Apache’s possibility to decide whether to exploit the reserves equals the difference between DCF value and the real option value.
The risk-free rate recommended under the CAPM model is the yield on long-term (i.e. 10+ years) T-bills. When choosing the T-bill term, it is important for it to closely represent the time frame used for Heinz’ required rate of return.
The dividends to Kennecott equal to the difference between Carborundum’s net income after adjustment and the profit retention. The methodology Kennecott’s management team used to determine the value of Carborundum to Kennecott was evaluated using an incorrect set of cash flows. First, it subtracted out the profit retention requirements needed to support Carborundum’s growth even though Kennecott would own the full equity in Carborundum, which is incorrect. Second, depending on the method used to value the company, the relevant set of cash flow is needed to be determined, either the free cash flow to the firm or the free cash flow to equity.
We valued the company using four different methods; Net Present Value, Internal Rate of Return, Modified Internal Rate of Return and Profitability Index. We began with the Net Present Value, or NPV, calculation. NPV values an investment’s profitability based on the projected future cash inflows and outflows of the investment, discounted back to present value using the WACC. The calculations for NPV are presented in Appendix 2. We started by separating cash inflows and outflows by each year. We used Bob Prescott’s estimates for the revenue per year and related operating costs of cost of goods sold as
Finally, we come up with the value for the operating after-tax operating cash flows for the next three years and the terminal value. We calculate the present value of these cash flows by discounting by the unlevered cost of capital, rU given as 8.7%, which gives us a value of the unlevered firm of ca. $566m.
Q2: Use the FCF Valuation Template below to modify the analysis in the case, Ex. 6 (incorrectly labeled Ex. 5), calculating and defending an estimate of Crocs value. Soln: The preferred method to determine a company’s going-concern value by adjusting for risk and time. Simply put, the value of equity = value of firm – value of debt. So to find the intrinsic or fair values of Crocs, the forecast numbers from exhibit 6 were plugged into the provided template and appropriate entries from the balance sheet and income statement were entered. Assumptions: The depreciation and amortization amounts, capital expenditures were pulled directly from exhibit 6 assuming them to be incremental. Other assumptions include the discount rate at 10.96%, the long-term growth at 6%, and market value of debt as zero and no redundant assets. The firm will have perpetual growth after 4 years at a rate of 6%. The free cash flows along with terminal value calculated are listed below:
The current valuation for the company is based on the DCF valuation model which assumes, valuation based a market risk-free rate of