GARRAN AND ELDAR PLC Harvard Case Solution & Analysis

GARRAN AND ELDAR PLC  Case Solution

PART 2

VALUATION OF THE EQUITY USING THE FREE CASH FLOW METHOD

The equity valuation for the company is done using the free cash flow technique, which is the most widely used technique in order to value the enterprise value for the company. The value of the cash in hand is added in that enterprise value to come up with the firm value. By subtracting the value of debt from the firm value, the equity value is calculated.

Assumptions

In order to calculate the equity value of the company, some assumptions are used relating to the discount rate to be used as well as the terminal growth rate of the company in order to calculate the terminal value for the company.

  1. Discount rate for the company is taken to be 16%
  2. Terminal growth rate of the company is taken to be 4%

In the given case, the values of the income statement as well as the balance sheet are given for the year 1 to the year 5. Therefore, the projections are made for the year 6 in order to get the enterprise value for the company. In doing the projection for the year 6 of the company, the historical values are taken of the company.

In projecting the income statement values of the company, each value of the income statement is taken with respect to the total turnover of the company for that period. It is done by dividing that value with the total turnover of the company. Similarly, all the ratios are taken for the five years. Afterwards, the average is taken for all those ratios. The average is then multiplied with the projected turnover of the year 6 to get that value for the year 6.

In a similar manner, the values of the balance sheet are taken for the future projection of the year 6. For the balance sheet items, the values of property plant and equipment, depreciation, current assets and current liabilities of the company are projected for the year 6. For the valuation of the company, the value of the capital expenditure is taken which is calculating by subtracting the value of property plant and equipment and the change is used in the calculation of the free cash flows.

The free cash flows of the company for the year 1 to the year 6 are calculated using the value of earnings before interest and taxes and then adding the value of depreciation to get the value of the operating cash flow for that year. From the operating cash flow of the company, the changes in the net working capital as well as the values of capital expenditure of the company are subtracted to get the free cash flows of the company for that period.

In order to calculate the terminal value of the company, the following formula is used

Terminal Value = FREE CASH FLOW FOR THE YEAR 6 * ( 1+ TERMINAL GROWTH RATE) / (DISCOUNT RATE – TERMINAL GROWTH RATE).

From the values of the net free cash flow for the company, the enterprise value of the company is calculatedby using the discount cash flow method, all the values are discounted to the year 2 with the help of the discount rate of 16%.

It can be seen that the enterprise value for the company is calculated to be 1157.51; the value of the cash available in hand is added to this enterprise value to get the company’s value for the company which is calculated to be 1432.11. From the company’s value, the value of the debt is subtracted to get the equity value for the company which in the given case is calculated to be 1178.86................

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