Application of discounted cash flow model valuation: The case of Excide industries

2021 ◽  
Vol 8 (4) ◽  
pp. 170-179
Author(s):  
Ashok Panigrahi ◽  
Kushal Vachhani ◽  
Mohit Sisodia
Keyword(s):  
Sensitivity Analysis ◽  
Cash Flow ◽  
Flow Model ◽  
Cost Of Capital ◽  
Weighted Average ◽  
The Other ◽  
Discounted Cash Flow ◽  
Worst Case ◽  
Share Prices ◽  
Valuation Technique

Theoretical and practical features of the widely used discounted cash flow (DCF) valuation approach are examined in depth in this paper. This research evaluates Exide Industries by using the DCF Valuation technique. It is widely accepted that the discounted cash flow approach is an effective tool for analyzing the situation of an organization even in the most complicated circumstances. The DCF approach, on the other hand, is prone to huge assumption bias, and even little modifications in an analysis' underlying assumptions may substantially affect the valuation findings. As a result, of the sensitivity analysis, we discovered bullish, base, and worst-case scenarios with target share prices of Rs. 253.25, Rs. 171.37, and Rs.133.25, respectively, by adjusting growth and WACC (Weighted-Average Cost of Capital) values.

A Comparison of the Weighted-Average Cost of Capital and Equity-Residual Approaches to Valuation

2017 ◽  
pp. 1-5
Author(s):  
Robert S. Harris
Keyword(s):  
Cash Flow ◽  
Average Cost ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Technical Note ◽  
Discounted Cash Flow ◽  
Investment Projects ◽  
Discounted Cash Flow Valuation

This technical note compares two methods of treating debt usage in discounted-cash-flow valuation of investment projects or companies. The note demonstrates that the approach using weighted average cost of capital (WACC) and the approach using equity residual (ER) yield equivalent results if consistent assumptions are used. General features are illustrated with specific examples, including a spreadsheet.

scholarly journals Over-Valuation: Avoid Double Counting when Retaining Dividends in the FCFE Valuation

2017 ◽  
Vol 8 (4) ◽  
pp. 107
Author(s):  
Joao Marques Silva ◽  
Jose Azevedo Pereira
Keyword(s):  
Cash Flow ◽  
Flow Model ◽  
Weighted Average ◽  
Free Cash Flow ◽  
Double Counting ◽  
Cost Of Equity ◽  
Discounted Cash Flow ◽  
Enterprise Valuation ◽  
A Value ◽  
The Cost

Valuation based on DCF (Discounted Cash Flow) has been the dominant valuation procedure during the last decades. In spite of this dominance, enterprise valuation using the discounted FCF (Free Cash Flow) model has some practical drawbacks, since there is often some confusion on how to effectively use it. Commonly, the valuation procedures start by estimating future FCF figures from historical data, such as mean FCF, growth and retention ratio, alongside many other variables. These FCF forecasts are discounted at the cost of equity (FCFE – FCF to Equity) or the Weighted Average Cost of Capital WACC (FCFF – FCF to Firm). Implicit in the above mentioned valuation procedures is the expectation that the company puts the retained free cash that is generating to good use, yielding a value capable of rewarding appropriately the level of risk inherent in the way it used. Some poorly performed valuation studies however tend to double count (Damodaran, 2006a) the retained cash’s interest in subsequent values of FCF, or include the accumulated cash build-up in the Terminal Value. This paper discusses how these two common double-counting mistakes are made and evaluates their weight in the final valuation figure for the particular case of retained FCFE (the case for the FCFF is analogous, but we focus on FCFE for simplicity) using projected figures.

scholarly journals Caveat WACC: Pitfalls in the use of the weighted average cost of capital

2009 ◽  
Vol 6 (3) ◽  
pp. 45-52 ◽  
Author(s):  
Sebastian Lobe
Keyword(s):  
Cash Flow ◽  
Average Cost ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Time Varying ◽  
Discounted Cash Flow ◽  
Leverage Ratio

In Discounted Cash Flow valuations, the WACC approach is very popular. Therefore, knowing which limitations the concept inherits is essential. The objective of this paper is thus twofold: First, it is clarified that a constant WACC rate must fail if the implied leverage ratio is time-varying. This seems to be the rationale for defining a nonlinear WACC (NLWACC). However, the NLWACC appears to be rather artificial when allowing for time-varying WACCs. Second, although the NLWACC approach is further amplified in this paper, it must be emphasized that this approach is, even then, applicable only under specific conditions while a time-varying WACC is still able to provide reliable results. In conclusion, the WACC approach is a valid workhorse whose results can be economically interpreted.

scholarly journals Analisis Kelayakan Pengembangan Proyek Apartemen Citra Living Citra Garden City

2019 ◽  
Vol 3 (6) ◽  
pp. 60
Author(s):  
Citra Sari Kusuma Wardhani Dan Yanuar
Keyword(s):  
Sensitivity Analysis ◽  
Cash Flow ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Urban Migration ◽  
Business Decision ◽  
Cash Flow Sensitivity ◽  
Increasing Demand ◽  
High Level

Jakarta is experiencing a favourite residential growth due to the high level of urban migration to Indonesia’s capital. Therefore, PT CD, through its subsidiary, PT CMG, KSO, tries to fulfill the increasing demand of residential housing by developing a ± 1 ha of land in the West of Jakarta. The development is called the Apartement Citra Living project. This paper is developed to determine the feasibility of the project through cash flow sensitivity analysis. There are 2 (two) assumptions used, which are : the normal, and optimistic assumptions. These assumptions are tested through 4 (four) calculation methods: Payback Period, Net Present Value (NPV), Internal Rate of Return (IRR) and Profitability Index (PI). The results of the sensitivity analysis are as follows Payback periods for the project are 8 months for normal and, 3 months for optimistic; The NPV is positive for all assumptions; The IRR for the normal and optimistic assumptions are higher than the Weighted Average Cost of Capital (WACC) 10%. The PI for normal and optimistic assumptions are more than 1 (one). So, the project is feasible. Therefore, based on the results of the sensitivity analysis of the project’s cash flow, it is concluded that the Apartement Citra Living project is a profitable business decision. To increase profitability level, the company should try to find other financing alternatives to lower the cost of capital.

scholarly journals Analisis Kelayakan Pengembangan Proyek Citra Garden Puri Semanan Citra Garden City

2019 ◽  
Vol 3 (2) ◽  
Author(s):  
Anugrahenny Sekreningtyas
Keyword(s):  
Sensitivity Analysis ◽  
Cash Flow ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Payback Period ◽  
Urban Migration ◽  
Business Decision ◽  
Cash Flow Sensitivity ◽  
High Level

Jakarta is experiencing a tremendous residential growth due to the high level of urban migration to Indonesia’s capital. Therefore, PT CD, through its subsidiary, PT CAP, tries to fulfill the increasing demand of residential housing by developing a 180,328 m2 of land in the West of Jakarta. The development is called the Citra Garden Puri project.This paper is developed to determine the feasibility of the project through cash flow sensitivity analysis. There are 3 (three) assumptions used, which are : the normal, pessimistic, and optimistic assumptions. These assumptions are tested through 3 (three) calculation methods: Payback Period, Net Present Value (NPV), Internal Rate of Return (IRR), and Profitability Index (PI).  The results of the sensitivity analysis are are Based on the Payback Period calculation, the project is deemed feasible. The current company’s payback period is approximately 4 years, while the payback periods for the project are 24 months, 24 months, a for the normal, and optimistic assumptions consecutively. Based on the NPV calculation, the project is deemed feasible. The NPV is positive for all assumptions. Based on the IRR calculation, the project is deemed feasible. The IRR for the normal and optimistic assumptions are higher than the Weighted Average Cost of Capital (WACC). Therefore, based on the results of the sensitivity analysis of the project’s cash flow, it is concluded that the Citra Garden Puri Semanan project is a profitable business decision. To increase profitability level, the company should try to find other financing alternatives to lower the cost of capital.

SFAS No. 123 Disclosures and Discounted Cash Flow Valuation

2000 ◽  
Vol 14 (2) ◽  
pp. 169-189 ◽  
Author(s):  
Leonard C. Soffer
Keyword(s):  
Cash Flow ◽  
Stock Options ◽  
Stock Option ◽  
Financial Statement ◽  
Employee Stock Options ◽  
Financial Statement Analysis ◽  
Discounted Cash Flow ◽  
Employee Stock Option ◽  
Valuation Technique ◽  
Discounted Cash Flow Valuation

One of the cornerstones of financial statement analysis is the discounted cash flow valuation. Despite the broad use of this valuation technique, and the economic importance of employee stock options to firm values, there is little guidance on how employee stock options should be incorporated in a valuation. This paper provides a comprehensive approach to doing so, including consideration of the income tax implications of option exercises, the simultaneity of equity and option valuation, and the use of the disclosures that were mandated recently by Statement of Financial Accounting Standards No. 123. The paper provides a comprehensive example using Microsoft's fiscal 1997 financial statements and employee stock option disclosure. This paper should be of interest to academics and practitioners involved in corporate valuation and financial statement analysis.

Profitability, risk and cash flow deficit for beginning cow–calf producers

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Carlos J.O. Trejo-Pech ◽  
Jared Bruhin ◽  
Christopher N. Boyer ◽  
S. Aaron Smith
Keyword(s):  
Cash Flow ◽  
Opportunity Cost ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Herd Size ◽  
Discounted Cash Flow ◽  
Production Risk ◽  
Content Type ◽  
Market Values ◽  
Cow Calf

PurposeThe purpose of this study is to estimate the amount of cash flow deficit, if any, needed to maintain the operating costs and service debt of a startup cow–calf enterprise. The study compares long-term profitability and risk between starting small and building a herd to full carrying capacity or by starting at desired herd capacity.Design/methodology/approachA dynamic cattle growth model was developed to capture expanding and maintaining the desired herd size. Discounted cash flow (DCF) models over a 15-year period were calculated to estimate net present value (NPV), modified internal rate of return (MIRR) and cash flow deficit to keep the business operating and service debt. Simulation analyses were conducted considering price and production risk.FindingsStarting at the desired herd size was preferred, according to NPV/MIRR and cash flow deficit, but the differences were not substantial. Assuming the operation is liquidated at book values, there was a 36.3% probability of this enterprise having a zero or positive NPV. If the conservative terminal value assumption is relaxed up to feasible market values, the cow–calf enterprise is economically attractive at an estimated 2.4% opportunity cost of capital. However, the producer would experience a cash flow deficit during the first seven years, which was simulated to be $14,892 and $15,985 annual for both strategies.Originality/valueInnovative methods used in this study include varying the annual opportunity cost of capital as a function of financing decisions, stochastic prices by cattle type and stochastic weaning weights that are a function of a dynamic cattle model.

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