1. Calculating Value per Share
So now that we have our unlevered free cash flows calculated
as well as our terminal values, we can now discount the cash flows
to derive enterprise value. From there, we will subtract net debt to obtain
equity value, then divide by shares outstanding to calculate what we think
the company's share price should be, and we can compare that to the
current market price. For now, we're going to assume
all of the cash flows occur at the end of the year.
So again, please attempt this. This will be a bit more challenging than
the other calculations, but we will obviously go through it together.
Okay, let's walk through this together. First step is we need to pull
in our unlevered free cash flows. It doesn't really matter which method
we use, we can pull it from one of these terminal value calculations,
or we can pull it from our unlevered free cash flow calculations
up above. So I'm just going to pull it from the EBITDA schedule.
Again, they all match and we'll fill that to the right.
We need to pull in our terminal value. Again,
for simplification purposes, and you might see this in real life,
we will use the average and then we just need to sum up
the total cash flows. So there are no terminal values in the years
2023 through 2026, but we still wanna throw in a sum.
Again, in that last year, 2027, we get the benefit of the unlevered
free cash flows as well as the terminal value,
we just wanna make sure that we capture that. Okay? Now,
our discounting period, again, as mentioned for this analysis, we're going
to assume that the cash flows all end at the end of the
year. Okay? And we can do some Excel trick curation here.
We can take the year 2023 minus 2022.
Again, Excel just sees those as numbers. So 2023 minus 2022 equals one.
Now, note that I have anchored 2022 because when you copy it out,
again, it's a five year forecast period. We still want to
base our discounting off of 2022. Now we can calculate the present value
of the cash flows. We can take our total cash flows,
we can divide it by one plus our WAC, and then raise that
to our discounting period and then copy that to the right.
But that can't possibly be right. The present value of cash flows must
be lower than the total cash flows. So in year 5, you can
see I have 149 million, which is what the undiscounted cash flow is.
And that's because I forgot to anchor the WAC calculation.
So we hit F2 to go into edit mode,
F4 to anchor WAC, and now we can copy that out.
Now it makes more sense. Now that we have the present value of
our cash flows, Those are all unlevered cash flows. So if we sum
those up, we get enterprise value, then we need to calculate our net
debt. So we're going to go ahead and make that
a negative number, but we'll have to go up to where a lot
of that data is. So we'll take our
debt of $20 million minus our cash of a little less than $6
million. And so we have total net debt of a little over $14
million. Again, we made it negative in this case
just so we could simply sum everything up. And we have an equity
value of a little less than $106 million.
Since we have total equity value or what we think the total equity
value should be, we want to actually calculate it on a per share
basis. So we'll reference our equity value, we'll divide by shares outstanding
and we calculate an equity value per share of $6.19.
The current price is $7.25. So let's just calculate
the upside or downside. So the market price is saying this company is
worth $7.25 per share. We just calculated $6.19. That's a 15%
downside to the current market price. So again,
we would probably not want to buy this stock, but of course we
will also use some relative valuation techniques to compare it to our DCF.
Remember, value is inherently unobservable, so we use multiple different
valuation methodologies to triangulate a value. DCF is just one of those
techniques, so we've got a couple of others that we'll look at to
see what we think that the true value of this company might be.
So another type of analysis that we can perform is to calculate the
implied growth rate when using the terminal multiple method.
We can also calculate the implied terminal multiple when using the perpetuity
growth method. For now, feel free to review these formulas. They're very
complex, but we do cover the derivation of these formulas in the appendix
to the course manual.
2. Let's practice!