Valuation course · Lesson 5 of 10
A DCF adds ten years of cash flow and a value for the rest.
Now we put the parts together. Project the cash flow, discount each year, add a value for the years after year 10, and divide by the shares.
The assumptions
NOPAT grows 8% in year 1, and the rate falls in a straight line to 3% in year 10. New capital earns 24.0%, as it did last year. Each year, the company reinvests growth divided by that return. The hurdle is 9%.
Ten years
| Year | Growth | NOPAT | Reinvestment | Cash flow | Discount factor | Present value |
|---|---|---|---|---|---|---|
| 1 | 8.0% | 153.6 | (51.2) | 102.4 | 0.917 | 93.9 |
| 2 | 7.4% | 165.0 | (51.2) | 113.8 | 0.842 | 95.8 |
| 3 | 6.9% | 176.4 | (50.6) | 125.7 | 0.772 | 97.1 |
| 4 | 6.3% | 187.5 | (49.5) | 138.0 | 0.708 | 97.8 |
| 5 | 5.8% | 198.4 | (47.8) | 150.6 | 0.650 | 97.9 |
| 6 | 5.2% | 208.7 | (45.4) | 163.3 | 0.596 | 97.4 |
| 7 | 4.7% | 218.5 | (42.5) | 176.0 | 0.547 | 96.3 |
| 8 | 4.1% | 227.5 | (39.0) | 188.5 | 0.502 | 94.6 |
| 9 | 3.6% | 235.6 | (34.9) | 200.7 | 0.460 | 92.4 |
| 10 | 3.0% | 242.6 | (30.3) | 212.3 | 0.422 | 89.7 |
The discount factor is one divided by 1.09 to the power of the year. Cash flow in year 10 is $212.3 million, but it is worth only $89.7 million today.
From the business to one share
| Step | $ millions |
|---|---|
| Present value of years 1 to 10 | 952.8 |
| Present value of the years after year 10 | 1,539.4 |
| Value of the business | 2,492.2 |
| Less net debt | (100.0) |
| Value of the equity | 2,392.2 |
| Per share, on 100 million shares | $23.92 |
The years after year 10 are worth more than the first ten years together. Lesson 6 shows that number and why it needs care.
Our value is $23.92 a share. The price is $30, which is 25% above our value. Lesson 7 asks what the price assumes.
Key points
- Project the cash flow from growth and the return on new capital.
- Discount each year, add the value of the years after year 10, and subtract net debt.
- Divide by the shares for a value per share.