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Free cash flow to firm DCF valuation model

Base data
Ticker
SIC code
FactSet identifier
Current market price
Current year end
Valuation date
Stub period proportion
NOSH (m)
Marginal tax rate
Net debt
Equity investments
Exit EV / EBITDA multiple
Discounting convention
ALL YELLOW CELLS SHOULD BE CHANGED. Green Typically, CTG add further functionality in the form of:
cells may (but need not) be changed. * Flexible operating scenaria such as base, upside and downside
* Diluted equity value taking into consideration the buy out cost of ITM
This is an illustration of a standard free cash flow to firm share options
DCF valuation model. The model has been setup according * More complex capital structures - pensions, minorities, prefs, etc
to CTG's best practice modelling guidelines. * Different ways of calculating the terminal value - growth perpetuity,
12.84 additional multiples or reinvestment rates
30 Sep 09 The model produces an equity valuation using an * Graph driven assumptions
EV/EBITDA exit multiple and a WACC calculation using * Time variant WACC calculations
15 Jul 09 CAPM and comparable betas. The cash flows are * International WACC issues and country risk premiums
20.8% discounted using either the mid-year or end of year * Time flexible sensitivity analysis
733.30 discounting convention. * 5 year vs. 10 year DCF
35.00% * Further beta deleveraging options
The model can deal with time-flexible stub periods and * Our models can be integrated into FACTSET's =FDS coding and CapIQ
1,433 produces sensitivity analysis.
303
7.5x
End of year

WACC assumptions Comparable beta information

Market based: Market Total debt Debt / Debt / Levered Tax Unlevered
Risk free rate 2.82% Cap Capital Equity beta rate beta
Unlevered comp beta 1.29 Median CompCo A 16,000 2,000 11.1% 12.5% 1.39 35.0% 1.29
US EMRP 4.50% CompCo B 6,600 1,300 16.5% 19.7% 1.34 35.0% 1.19
Firm specific: CompCo C 2,400 200 7.7% 8.3% 1.14 35.0% 1.08
Target Debt / Equity 25.00% CompCo D 1,900 500 20.8% 26.3% 1.85 35.0% 1.58
Credit risk premium 5.00% CompCo E 1,200 500 29.4% 41.7% 1.97 35.0% 1.55
Levered beta 1.49 Mean 17.1% 21.7% 1.54 35.0% 1.34
Cost of equity 9.55% Median 16.5% 19.7% 1.39 35.0% 1.29
Cost of debt (pre-tax) 7.82% High 29.4% 41.7% 1.97 35.0% 1.58
Cost of debt (post tax) 5.08% Low 7.7% 8.3% 1.14 35.0% 1.08
Weighting of debt 20.00%
Weighting of equity 80.00%
WACC 8.65%

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Discounted cash flow

30 Sep 06 30 Sep 07 30 Sep 08 30 Sep 09 30 Sep 10 30 Sep 11 30 Sep 12 30 Sep 13 30 Sep 14 30 Sep 15 30 Sep 16 30 Sep 17 30 Sep 18 30 Sep 19
(3) (2) (1) -- 1 2 3 4 5 6 7 8 9 10
Sales 7,787 9,412 10,383 11,525 12,600 13,598 14,510 15,337 16,077 16,736 17,318 17,828 18,274 18,731
COGS (6,120) (7,509) (8,721) (9,566) (10,416) (11,194) (11,897) (12,523) (13,074) (13,554) (13,968) (14,321) (14,619) (14,984)
SG&A (479) (489) (456) (507) (562) (616) (666) (714) (759) (802) (842) (879) (914) (937)
Restructuring charges -- -- -- -- -- -- -- -- -- -- -- -- -- --
EBITDA 1,187 1,413 1,207 1,452 1,622 1,788 1,947 2,100 2,244 2,380 2,508 2,628 2,741 2,810
DA (387) (467) (549) (544) (581) (612) (638) (658) (674) (685) (692) (696) (696) (714)
EBIT 800 946 657 908 1,041 1,176 1,310 1,441 1,570 1,695 1,816 1,933 2,045 2,096
Unlevered cash taxes on EBIT (274) (342) (259) (300) (346) (393) (441) (488) (535) (582) (627) (672) (716) (734)
EBIT (1-Tc) 526 604 398 608 696 783 869 953 1,035 1,113 1,189 1,261 1,329 1,362
DA 387 467 549 544 581 612 638 658 674 685 692 696 696 714
Decrease (increase) in NWC 222 159 76 80 74 67 61 54 48 42 36 31 27 27
Net capex (771) (1,080) (985) (980) (985) (978) (959) (933) (899) (861) (819) (775) (731) (749)
Unlevered free cash flow 364 150 39 253 365 485 608 733 857 979 1,098 1,212 1,321 1,354
Stub period unlevered free cash flow 53 -- -- -- -- -- -- -- -- -- --
Terminal value -- -- -- -- -- -- -- -- -- -- 21,072
Unlevered free cash flow to discount 53 365 485 608 733 857 979 1,098 1,212 1,321 22,426
Discount factor 0.98 0.90 0.83 0.77 0.71 0.65 0.60 0.55 0.51 0.47 0.43
Present value of unlevered free cash flow 52 331 404 466 517 556 585 604 613 615 9,613

Implied valuation Analysis

PV of terminal value 9,032 62.9% Implied EV / EBITDA 2009 9.9x
PV of unlevered free cash flows 5,323 37.1% 2010 8.8x
Implied EV 14,355 100.0% 2011 8.0x
Less: net debt (1,433) Implied terminal value 21,072
Add: Investments accounted under the equity method 303 Implied terminal EBITDA 2,810
Implied equity value 13,224 Implied terminal cash flow 1,354
NOSH 733 Exit EBITDA multiple 7.5x
Implied equity value per share 18.03 Implied growth rate in exit multiple 2.09%
Current equity value per share 12.84
Premium / discount 40.5%

Cash flow forecast assumptions

Sales growth rates 20.86% 10.32% 11.00% 9.33% 7.91% 6.71% 5.69% 4.83% 4.10% 3.47% 2.95% 2.50% 2.50%
COGS as % of sales 78.60% 79.79% 83.99% 83.00% 82.66% 82.32% 81.99% 81.65% 81.32% 80.99% 80.66% 80.33% 80.00% 80.00%
SG&A as % of sales 6.16% 5.20% 4.39% 4.40% 4.46% 4.53% 4.59% 4.66% 4.72% 4.79% 4.86% 4.93% 5.00% 5.00%
Tax rates on EBIT 34.25% 36.16% 39.41% 33.00% 33.22% 33.43% 33.65% 33.87% 34.10% 34.32% 34.55% 34.77% 35.00% 35.00%
Decr (incr) in NWC as incr in sales 9.81% 7.77% 7.00% 6.88% 6.76% 6.65% 6.54% 6.43% 6.32% 6.21% 6.10% 6.00% 6.00%
Capex as % of sales 9.90% 11.48% 9.48% 8.50% 7.82% 7.19% 6.61% 6.08% 5.59% 5.14% 4.73% 4.35% 4.00% 4.00%
Capex / Depn multiples 1.99x 2.31x 1.79x 1.80x 1.70x 1.60x 1.50x 1.42x 1.33x 1.26x 1.18x 1.11x 1.05x 1.05x
Ratios
EBITDA margin 15.25% 15.01% 11.62% 12.60% 12.88% 13.15% 13.42% 13.69% 13.96% 14.22% 14.48% 14.74% 15.00% 15.00%
EBIT margin 10.27% 10.05% 6.33% 7.88% 8.27% 8.65% 9.02% 9.40% 9.77% 10.13% 10.49% 10.84% 11.19% 11.19%

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EBIT (1-Tc) margin 6.75% 6.42% 3.84% 5.28% 5.52% 5.76% 5.99% 6.21% 6.44% 6.65% 6.86% 7.07% 7.27% 7.27%
EBITDA growth 19.03% (14.62%) 20.36% 11.72% 10.21% 8.91% 7.81% 6.87% 6.07% 5.38% 4.79% 4.29% 2.50%
EBIT growth 18.24% (30.52%) 38.15% 14.70% 12.91% 11.37% 10.06% 8.93% 7.97% 7.14% 6.42% 5.80% 2.50%
EBIT (1-Tc) growth 14.81% (34.06%) 52.76% 14.33% 12.54% 11.00% 9.69% 8.57% 7.60% 6.77% 6.05% 5.43% 2.50%
Unlevered free cash flow growth (58.76%) (74.35%) 556.79% 44.54% 32.64% 25.42% 20.52% 16.96% 14.24% 12.11% 10.40% 9.00% 2.50%
Sensitivity analysis

Implied EV Implied equity value

Exit EV / EBITDA WACC Exit EV / EBITDA WACC
14,355 8.15% 8.40% 8.65% 8.90% 9.15% 13,224 8.15% 8.40% 8.65% 8.90% 9.15%
7.00x 14,311 14,029 13,753 13,483 13,220 7.00x 13,181 12,898 12,622 12,353 12,090
7.25x 14,627 14,337 14,054 13,777 13,507 7.25x 13,497 13,207 12,923 12,647 12,377
7.50x 14,943 14,645 14,355 14,071 13,795 7.50x 13,812 13,515 13,224 12,941 12,664
7.75x 15,258 14,953 14,656 14,365 14,082 7.75x 14,128 13,823 13,526 13,235 12,952
8.00x 15,574 15,262 14,957 14,659 14,369 8.00x 14,443 14,131 13,827 13,529 13,239

Implied EV / EBITDA (2009) Implied EV / EBITDA (2010)

Exit EV / EBITDA WACC Exit EV / EBITDA WACC
9.89x 8.15% 8.40% 8.65% 8.90% 9.15% 8.85x 8.15% 8.40% 8.65% 8.90% 9.15%
7.00x 9.86x 9.66x 9.47x 9.28x 9.10x 7.00x 8.82x 8.65x 8.48x 8.31x 8.15x
7.25x 10.07x 9.87x 9.68x 9.49x 9.30x 7.25x 9.02x 8.84x 8.66x 8.49x 8.33x
7.50x 10.29x 10.09x 9.89x 9.69x 9.50x 7.50x 9.21x 9.03x 8.85x 8.67x 8.50x
7.75x 10.51x 10.30x 10.09x 9.89x 9.70x 7.75x 9.40x 9.22x 9.03x 8.85x 8.68x
8.00x 10.72x 10.51x 10.30x 10.09x 9.89x 8.00x 9.60x 9.41x 9.22x 9.04x 8.86x

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