Valuation

Assessment 4: of a Firm Using Free Cash Flow Method

Problem Statement
The objective of this assessment is to conduct a comprehensive valuation of ITC Limited utilizing the Free
Cash Flow to Firm (FCFF) method. This assessment aims to provide insights into the intrinsic value of the
company, assisting stakeholders in making informed financial decisions and strategic planning.

Background: ITC limited is a prominent player in the Indian market and it operates in many different
segments like FMCG, paper and tobacco known for its unique selling propositions, market position, and
competitive advantage. The company operates in a dynamic business environment, facing various
challenges from the macroeconomic environment. As part of its financial management strategy, ITC Limited
seeks to understand its intrinsic value using robust valuation methodologies like FCFF.

Tasks
1. Data Collection: Collect historical financial data of ITC Limited including income statements, balance
sheets, and cash flow statements for the past 3 years.
2. Cost of Equity Calculation: Calculate the cost of equity using the CAPM model. The risk-free rate,
market returns and beta can be researched from trusted online sources. Please give reference to
the source. Assume corporate tax rate of 25%.
3. FCFF Calculation:
a. Calculate Free Cash Flow to Firm (FCFF) for each year using the following formula:
i. FCFF = EBIT(1 - Tax Rate) + Depreciation & Amortization - Change in Net Working
Capital - Capital Expenditure + Net Borrowing.
b. Assume that the company is investing Rs 500 cr in a new project (the WACC remains
unchanged at 15%). The project depreciates fully in 5 years. Assume a straight line method
of depreciation for simplicity. The new project is expected to increase the new working
capital requirement by Rs 10 cr in the first year. This project will increase revenue by 12%
every year. The operating expenses also increase by 10%.
4. Terminal Value Calculation: Estimate the terminal value using the Gordon Growth Model (assuming
perpetual growth after 5 years. The terminal growth rate is to be assumed at 4%)
5. Discounted Cash Flow (DCF) Valuation: Calculate the present value of FCFF and terminal value using
the WACC.
6. Written Explanation: A brief valuation report(max 450 words)detailing the FCFF methodology,
assumptions made, and results.
7. Presentation: Finally summarise everything with a visually engaging presentation document with no
more than 7-10 slides.

Submission Details
● Create an Excel Sheet, Word doc and PPT wherever necessary. Compress all the files(Excel, doc and
PPT) in a zip format before submission.
● We will check the authenticity of the work. You may refer to internet sources and ChatGPT etc. but
you are required to share the references and prompts used in word doc prepared.

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 Valuation
● It is expected that each one of you do this assignment individually and do not copy paste from each
other. Ensure the highest level of ethical behavior while preparing this assignment.

Rubrics
1. Accuracy and completeness of the valuation methodology. (40%)
2. Soundness of assumptions made and rationale provided. (20%)
3. Clarity and coherence of the valuation report and presentation. (20%)
4. Depth of analysis and interpretation of results. (10%)
5. Overall presentation quality and adherence to deadlines. (10%)

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