To value a company using enterprise discounted cash flow DCF

To value a company using enterprise discounted cash flow DCF

To value a company using enterprise discounted cash flow (DCF), we discount
free cash flow by the weighted average cost of capital (WACC). The weighted
average cost of capital represents the opportunity cost that investors face for
investing their funds in one particular business instead of others with similar
risk. To determine the weighted average cost of capital, calculate its three
components: the cost of equity, the after-tax cost of debt, and the company’s
target capital structure. Since none of the variables is directly observable, we
employ various models, assumptions, and approximations to estimate each
component. In this assignment you will be using financial information from
Henkel AG and selected market data (in Excel) to assist in answering the
questions given below.

To value a company using enterprise discounted cash flow DCF

Question 1 – 50%
The cost of equity is built on the three factors: the risk-free rate, the market
risk premium, and a company-specific risk  adjustment. The most commonly
used model for this estimate is the capital asset pricing model (CAPM). To
determine the CAPM, we need to estimate a risk-free rate, the market risk
premium, and the market beta.
a.  To determine the risk-free rate, please use  Treasury data from the
“Select Market Data” spreadsheet. On the “Yields” tab, you will
find yields to maturities for U.S. and German Treasury rates. For
Henkel AG, which Treasury rate at which maturity is most
appropriate to use in valuing the company?
b.  To  determine Henkel’s corporate beta, unlever (and relever) the
ordinary least squares (OLS) market betas for each company in
the European Household and Personal Care segment. Prices can
be found on the “Prices” tab of the “Select Market Data”
spreadsheet. To determine the OLS market beta, regress 10-year
monthly returns against the MSCI World index denominated in the
same currency. In Excel, this can be done using the “SLOPE”
formula. Next, unlever the market beta using each company’s

year-end debt-to-equity ratio and the formula: bu = be/(1 + D/E).
To determine Henkel’s corporate beta, re-lever the average
industry beta using Henkel’s year-end debt-to-equity ratio. Repeat
this process for each of Henkel’s divisions.

c.  Assume the market risk premium equals 5 percent.

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By admin in Essays on October 24, 2015