VALUATION OF SHARES BASED ON FREE CASH FLOW

PROBLEM
Consider the following information in respect o( ₹ in Crores)
Particulars 2013 2014 2015 2016 2017
Total Revenue 57.73 69.86 81.74 92.37 100.66
Cost of Goods Sold 23.93 29.93 35.24 39.72 42.28
Gross Profit 33.8 39.93 46.5 52.65 58.38
Administrative Expenses 3.56 4.38 5.11 5.72 6.07
Selling and Distribution Expenses 18.26 23.14 27.91 32.19 35.53
Depreciation 4.7 2.43 1.59 1.27 2.18
EBIT 7.28 9.98 11.89 13.47 14.6
Additional Information
Marginal Tax Rate 33.90% 33.90% 33.90% 33.90% 33.90%
Increase in Operating Working capital 3.3 3.6 4 4.1 4.2
Capital Expenditure 0.61 0.66 0.61 0.78 0.92
Assuming that the company is having 3.5 crores number of equity shares, Debt of ₹ 0.75 crores, steady growth of 8% in fr
2017 and weighted average cost of Capital(WACC) of 12.5%. Determine the value of its share using free cash fow valuation

SOLUTION
VALUATION OF SHARES BASED ON FREE CASH FLOW (₹ in crores)
2013 2014 2015 2016 2017
Total Revenue 57.73 69.86 81.74 92.37 100.66
Cost of Good Sold 23.93 29.93 35.24 39.72 42.28
Gross Profit 33.8 39.93 46.5 52.65 58.38
Administrative Expenses 3.56 4.38 5.11 5.72 6.07
Selling and Distribution Expenses 18.26 23.14 27.91 32.19 35.53
Depreciation 4.7 2.43 1.59 1.27 2.18
EBIT 7.28 9.98 11.89 13.47 14.6
Marginal Tax 2.47 3.38 4.03 4.57 4.95
NET OPERATING PROFIT AFTER TAX 4.81208 6.59678 7.85929 8.90367 9.6506
Add: Depreciation 4.7 2.43 1.59 1.27 2.18
Less: Increase in Operating Working capita 3.3 3.6 4 4.1 4.2
Less:Capital Expenditure 0.61 0.66 0.61 0.78 0.92
Free Cash Flows 5.60 4.77 4.84 5.29 6.71

Terminal Value(Calculated using constant growth model)

Total Free Cash fows 5.6 4.77 4.84 5.29 6.71
Discounting factor@12.50% 0.8889 0.7901 0.7023 0.6243 0.5549
PV of free cash fows 4.98 3.77 3.40 3.30 3.72
Total PV of free cash fows 103.89
Less: Debt liability 0.75
Total Valueof equity 103.14
No. of equity shares (in crores) 3.50
Value per equity share 29.5
 2018
107.72
45.76
61.96
6.55
38.37
1.83
15.21

33.90%
4.3
0.71
ores, steady growth of 8% in free cash fow afer
using free cash fow valuation method

es)
2018
107.72
45.76
61.96
6.55
38.37
1.83 Free cash fow in 2018 6.87
15.21 Growth rate(g) 0.08
5.16 (1+g) 1.08 (6.87∗1.08)/█((.125−.08)@)
10.05381 WACC(used as discounting rate ' r' ) 0.125
1.83 (r - g) 0.045
4.3 (Free cash fow in 2018) × (1+g) 7.4196
0.71 Terminal value 164.88
6.87

164.88
171.75381
0.4933
84.72
25−.08)@)