Vodafone Case

* First, we calculate the Net Operating Profit after Tax, which is equals to EBIT×1-t.

For the purpose of calculating the net present value of the project, an appropriate cost of capital has to be calculated at which free cash flows of the project should be discounted. Since the project will be solely financed by selling new shares, cost of equity will be used as the discount rate. Beta for the company can be assumed to be equal to average of the betas of the competitors of the company. This average beta value comes out to be 1.2. Risk free rate is 0.17% while risk premium has been estimated to be 6%. Thus by putting these values in CAPM formula, we can find the cost of equity for the company which is 7.39%.

Risk free rate is taken to be 4.69% while the market risk premium is 5.01%.

What is the net present value of this follow-up investment and the combined base and expansion investments?

What risk-free rate and the risk premium did you use to calculate the cost of equity?

15. What is the Present Value (NPV) to Sterling of the base investment using FCF for 2013-2033?

Given that the total profit over 8 years is $1.2375B (or $155M per year for 8 years), we will now compute the Present Value of this amount using the following formula:

* Stock Beta: Exhibit 5 shows a detailed measurement of the company’s stock returns in relation to the rest of the market through 5-year historical price and index data. The analysis includes monthly returns of both the NYSE and the S&P 500 index in order to capture a comprehensive view of the market return. In each comparison, the monthly returns of the Target stock and market are plotted on Y-axis and X-axis respectively to get the regression line’s slope or beta. The analysis arrives at an average beta of 0.988 which indicates a similar movement of Target stock’s returns in comparison to the whole market over time.

Since this project is a going concern, the levered terminal and present values are calculated using the weight average cost of capital (WACC) as the discount rate, which we calculate to be 16.17%.

Cost of Equity = Risk free rate + (Market return – risk free rate) X beta

Beyond this broad understanding, you shouldn’t worry any more about how the specific numbers were estimated – but you should understand how to interpret them. For example for The ‘Burbs, the numbers in Exhibit 7 suggest that the value of the sequel at t=3 (using the suggested 12% discount rate) is :

To calculate the cost of debt and equity for this project, we combined the risk-free rate with a risk premium based on the market risk premium and the riskiness of Southwest Airlines.

The next step was to calculate the free cash flows for the eleven-year period. In order to do so, we used to following formula: FCF = EBIT(1-tax) + depreciation - change in NWC – CapEx. From here, we used to WACC of 13.89% previously calculated, in order to find the present value of each FCF.

* Compute the value with leverage, VL, by discounting the free cash flows of the investment using the WACC.

E = 89.89%, D = 10.19%, re = 10.46%, rd = 7.16%, tax rate = 38%