The Free Cash Flow Business Valuation Model
Instructions: Change any of the forecasting variables shown in red below and observe the effect on the model's outputs in the section below. To what variable is the business value conclusion most sensitive? To what variable is it least sensitive?
The Discounted Free Cash Flow Model for a Complete Business
Pie In the Sky Company
Forecasting Variables:
2002 2003 2004 2005 2006
Revenue growth factor Expected gross profit margin S, G, & A expense % of revenue Depr. & Amort. % of revenue Capital expenditure growth factor Net working capital to sales ratio Income tax rate Assumed long-term sustainable growth rate Discount rate 20% 50% 50% 10% 40% 19% 30% 51% 40% 10% 35% 18% 40% 52% 30% 10% 30% 17% 50% 53% 29% 10% 25% 16% 40% 5% 20% 60% 54% 28% 10% 20% 15%
2007
50% 55% 27% 10% -10% 14%
2008
40% 56% 26% 10% -15% 13%
2009
30% 57% 25% 10% -20% 12%
2010
20% 58% 24% 10% -25% 11%
2011
10% 59% 23% 10% -30% 10%
40% 5% per year after 2011 20%
2002 2003 2004 2005 2006
Valuation Model Outputs:
2007 55% 11% $0.7
2008 56% 12% $2.8
2009 57% 13% $5.2
2010 58% 14% $7.3
2011 59% 16% $8.8 $61.8
Gross profit margin Net operating profit margin Free cash flow ($ mil) Terminal value ($ mil) PV of Company Operations ($ mil) Market Value of Company Assets ($ mil)
50% 51% 52% 53% 54% -10% 1% 12% 10% 10% ($1.3) ($1.4) ($1.3) ($1.4) ($1.0)
$11.1 $11.6
The Discounted Free Cash Flow Model for a Complete Business
Pie In the Sky Company Years Ending December 31 Actual |------------------------------------------------------------------------------------------ Forecast ----------------------------------------------------------------------------------------| 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total revenue Cost of Goods Sold Gross profit Selling, general and administrative expenses Earnings before interest, taxes, depr. & amort. (EBITDA) Depreciation and amortization Earnings before Interest and taxes (EBIT) Available tax-loss carryforwards Net taxable earnings Federal and State Income Taxes Net Operating Profit After-Tax (NOPAT) Add back depreciation and amortization Subtract Capital Expenditures Subtract New Net Working Capital Free Cash Flow Terminal value, 2011 Present Value of Free Cash Flows @ 20% (1,103,333) (984,167) (742,986) (676,305) (418,400) 230,287 793,016 1,203,922 1,418,211 $2,000,000 1,200,000 800,000 1,200,000 (400,000) 200,000 (600,000) 0 0 0 (600,000) 200,000 (1,000,000) $2,400,000 1,200,000 1,200,000 1,200,000 0 240,000 (240,000) (600,000) 0 0 (240,000) $3,120,000 1,528,800 1,591,200 1,248,000 343,200 312,000 31,200 (840,000) 0 0 31,200 $4,368,000 2,096,640 2,271,360 1,310,400 960,960 436,800 524,160 (808,800) 0 0 524,160 $6,552,000 $10,483,200 $15,724,800 $22,014,720 $28,619,136 $34,342,963 3,079,440 3,472,560 1,900,080 1,572,480 655,200 917,280 (284,640) 632,640 253,056 664,224 4,822,272 5,660,928 2,935,296 2,725,632 1,048,320 1,677,312 0 1,677,312 670,925 1,006,387 7,076,160 8,648,640 4,245,696 4,402,944 1,572,480 2,830,464 0 2,830,464 1,132,186 1,698,278 1,572,480 (3,316,950) 733,824 $687,632 9,686,477 12,328,243 5,723,827 6,604,416 2,201,472 4,402,944 0 4,402,944 1,761,178 2,641,766 2,201,472 (2,819,408) 817,690 $2,841,521 12,306,228 16,312,908 7,154,784 9,158,124 2,861,914 6,296,210 0 6,296,210 2,518,484 3,777,726 2,861,914 (2,255,526) 792,530 $5,176,644 14,424,045 19,918,918 8,242,311 11,676,607 3,434,296 8,242,311 0 8,242,311 3,296,924 4,945,387 3,434,296 (1,691,645) 629,621 $7,317,659 $37,777,260 15,488,676 22,288,584 8,688,770 13,599,814 3,777,726 9,822,088 0 9,822,088 3,928,835 5,893,253 3,777,726 (1,184,151) 343,430 $8,830,257 $61,811,799 11,409,086
240,000 312,000 436,800 655,200 1,048,320 (1,400,000) (1,890,000) (2,457,000) (3,071,250) (3,685,500) 76,000 129,600 212,160 349,440 589,680 ($1,400,000) ($1,324,000) ($1,417,200) ($1,283,880) ($1,402,386) ($1,041,113)
Total Present Value of Company Operations $11,129,331 Plus Current Assets 500,000 from Pie in the Skys' December 31, 2001 Balance Sheet Total Market Value of Great Expectations' Assets $11,629,331