AKAM DCF Model Harvard Case Solution & Analysis

ANALYSIS:

ASSUMPTIONS

The projections of the income statement, balance sheet and the statement of cash flows have been prepared. Those projections can be found in the attached excel file. In that excel file the green colored sheets are the sheets in which I have performed my working with regarding to the projection of the business’s income statement, the balance sheet and the statement of the cash flows. In those green colored sheets, the green colored texts are my workings.

The projection for five years and after making those projections has been made, it can be said that Akamai Technology is a profitable business as it is showing steady profits over the period. However, there is cash deficit at the end of every year in the projection period in the cash flow statement. This implies that the company will always be in trouble in generating the cash for the short or the long period of investments. The working capital management can also be affected through this negative factor, which can cause ultimate loss of the credit ability of the Akamai if it will not be able to pay to its suppliers on a timely basis.

I have also projected and calculated the free cash flows of the business. Following the free cash flows, the terminal value of the business has been calculated by taking the growth assumption and the assumption for the weighted average cost of capital, which is also justified in this analysis. After computing the terminal value of the business, the value of the shares of the business has been calculated.

The growth rate is taken as 2%; this is the flat rate that has been taken. This growth rate is taken as the rate of growth of the sale for the entire period. This is because it can be assumed that the business will grow with the same percentage as the sales will grow, therefore the 2% growth rate has been taken, which is also the growth rate of the sales.It is also properly linked, which can be found in the excel file.

The weighted average cost of capital is basically a rate, which explains that a company has to be paid by the company to the fund providers or the shareholders. In other words the weighted average cost of capital is the cost for the company. The cost of capital has been assumed as 10% and justification behind this assumption is that this is the average rate is used by each company. Otherwise, it can be calculated by using the proper data but for that more information will be required. Therefore, the 10% cost of capital has been assumed and this is the realistic assumption based on the justification provided.

After calculating the terminal value, the value of the business has been calculated in the excel file. The value of the Akamai Technology is $ 44,623 million. This is the value of all the shares based on those five years for which I have projected the figures. Although this value of the business is based on the assumptions however,it shows the most accurate picture of the business. The assumptions that have been used are the rate of growth and the weighted average cost of capital. The discounted free cash flow model is the model, which is used widely by the world to value a business.

The detailed analysis has been performed on the return on the initial capital (ROIC). The ROIC shows that the return on the initial capital is implied, in other words we can also say that the return on what were invested. The ROIC analysis can be found in the excel file.All the green colored sheets in that excel file are my workings. We can see through the analysis of ROIC that there is a huge increment in the in the ROIC over the period.AKAM DCF Model Case Solution

QUESTION (a)

The effective tax rate is the average tax rate on the income of a company. This means that the company’s tax rate will be averaged on the different incomes and then it will be added to get an effective tax rate. The effective tax rate of Akamai technology is 32.5%. This effective tax rate is different from the statutory tax rate because the statutory tax is the tax at the different income levels.After that,by taking the average of those tax rates, we will get the effective tax rate. From the footnotes of the company, it can be said that the effective tax rate of the next fiscal year would be same as 32.5%. The reason behind this same rate is that the level of income is almost same. We can see in the projected income statement model that the earnings before tax are almost the same for the next fiscal year.............................

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