Analysis of Historical Performances

1 Re-organizing of Financial Statements in term of NOPLAT & Free Cash Flow

2 Drivers of FCF
3 Measurement & analysis of ROIC
4 Decomposition of Sales Growth into various components
5 Assessment of company's financial health & capital structure

Following steps to follow in the cal of historical performances:

1 Operating Invested Capital
2 EBIT
3 Taxes on EBIT
4 NOPLAT
5 ROIC
6 Net Investment
7 Free Cash Flow (FCF)

CASE 1 Sol
1 Operating Invested Capital
Total Assets as per B/S
Less: Non Operating Fixed Assets for e.g. Surplus Land
Less: Excess Cash & Mktg Sec
OIC

2 EBIT
PBT
Add: Interest Exp
Less: Income from Mktg Sec
Less: Non Op Income
EBIT (A)

3 Taxes on EBIT
Tax provision as per the Income Statement
Add: Tax Shield on Interest Exp @ 40%
Less: Tax on Income from Mktg Sec
Less: Tax on Non Op Income
Taxes on EBIT (B)

4 NOPLAT
A-B

5 Return on Invested Capital (ROIC)

NOPLAT/Operating Invested Capital (beg period)

NOPLAT
OIC (in the beg period)
 ROIC

6 Net Investement
(Net FA + Net CA at the End) - (Net FA + Net CA at the Beg )
Net FA at the end
Net CA at the end
Net FA at the beg
Net CA at the beg

Net Investment ( Net FA + Net CA)

7 Free Cash Flow (FCF)

FCF = NOPLAT - Net Investment
OR
FCF = (NOPLAT + Dep) - (Net Investment + Dep)
OR
FCF = Gross Cash Flow - Gross Investment
NOPLAT
Add: Dep
Gross Cash Flow (A)

Gross Changes in Net CA

Capital Expenditure (Change in FA + Dep)
Total Gross Investment (B)

FCF (A - B)
 in Million
Years
1 2 3
200 258 285
0 0 0
0 20 25
200 238 260

26 30 36
12 15 16
0 0 -3
0 0 -8
38 45 41

8 9 12
4.8 6 6.4
0 0 -1.2
0 0 -3.2
12.8 15 14

25.2 30 27

25.2 30 27
200 238 Less
 15.00% 11.34% Add
Add
Year 2 Year 3

150 175 190

50 63 70
-150 -175
-50 -63

38 22

-8 5

Year
1 2 3
25.2 30 27
12 15 18
37.2 45 45
50 63 70
13 7
40 33
53 40

-8 5
Understanding the Tax Shield on Interest: Case 1 Case 2
INR cr
EBIT 100 100
Int 40
PBT 60
Tax @ 40% 24 40
PAT 36 60

Borrow
As per case 1:
Diff in Taxes 16 Savings
Tax Shield on Int

As per case 2 ( For Valuation Purpose):

Taxes as per case 1 24
Add: Tax Shield on Int 16
40
Valuation (to derive the value of Firm)
Equity + Debt = Value

In Normal Case In Val. Case

EBIT PBT
Int Exp Add: Int Exp
Income on Int Less: Income on Int
Income on Non Op Less: Income on Non Op
PBT (given) EBIT
 Enterprise DCF Model ( Future Value)
Equity + Debt

FCF

FCFF

Free Cash Flow to the Firm

Bookish Approach EBIT (1-t) + Dep - Capex - WCC

Derivation FCFF

Present Period
Industry Approach 2020
EBITDA
Less Taxes on EBITDA @40%
EBITDA (1-t) @60%
Add Dep * Tax
Less Capex
Less Changes in Working Capital
FCFF (Explicit Period) (A)
PVF @10% (B)
PV of FCFF
Total of PV of FCFF (Explicit Period Value) © 1+2+3+4+5 (sum of 5 Years Explicit Period PV o

Add: Terminal Period Value

FCFF of 2025 * (1+ g) / Ko - g = FCFF of TP
FCFF of TP * 2025 PVF = PV of TP (D)
Value of Firm ( C + D)
( Explicit Period Value + Terminal Period Value)
 Bookish

Industry Oriented

PBT Assumptions Sheet2021 to 2025

Add Int Exp
Operating Activity Less Int Income
Investing Activity Add Dep & A
EBITDA
Estimated/Projected Years
2021 2022 2023 2024 2025

1/(1+r)^n

Years Explicit Period PV of FCFF)

WACC Ko 16%
g 5%
11%
 Value of the Firm

FCF FCFF
Case 1 Case 2
Op Cash Flow OP + Op Cash Flow

Continuing Period
2030 Sales
(Terimnal Value) Less COGS (Exl Dep)
EBITDA
Less Dep Remains Within Firm
EBIT
Cr
Dep 100
Tax @ 40%
Tax on Dep 40
Case Study DCF Model - D. Powder Co Forecasted Period
2020 2021
Particulars 0 1 2 3

EBIT 140 115 130

Less Taxes @ 35% 49 40.25 45.5
0.35
EBIT (1-t) 91 74.75 84.5
Add Dep 55 85 80
Less Gross Investment - Capex -100 -250 -85
Less Changes in Net Current Assets -10 -15 -70
FCF/FCFF (A) 36 -105.25 9.5
PVF (B) 14% 0.877193 0.7694675 0.6749715
PV of FCFF (A * B) 31.57895 -80.986457 6.4122294
Explicit Period Value (Sum of PV of FCFF) (C ) 72.250840123
Terminal Period Value (D) 1247.2251226
FCFF of 6th Year *(1+g)/(Ko - g)
2737.625

i Value of the Firm ( C + D) 1319

Working Notes: Given: D/E 0.4 : 1 1.4

1 WACC (Weighted Avg Cost of Capital) = Ko

Weight of Equity 0.7142857143

Weight of Debt 0.2857142857
1
Cost of Equity Ke 0.1648
Cost of Debt (Post Tax) Kdt 0.078 Tax @ 35%

WACC = (Ke*We) + (Kdt *Wd) 14.00%

2 Growth for Terminal Period 10.00%

 2026
4 5 6

222 245 287

77.7 85.75 100.45
Growth Rate for TP
144.3 159.25 186.55
83 85 87 GR RoE * Retention Ratio
-100 -105 -120
-70 -70 -54 GR Country's GDP Rate
57.3 69.25 99.55
0.5920803 0.5193687 0.4555865
33.9262 35.96628 45.353641

ii Value of Equity
Vaue of Firm 1319
Less: Value of Debt -200
VoE 1119

0.12
0.042
0.078