You will complete a DCF for your modelled company and write a one-page note on the result.
This project turns the model from module 7 into a valuation and a written view. You'll build a valuation tab linked to your forecast, produce a value range rather than a single number, test what the market already assumes, and write one page that someone else could challenge. You keep the note; the spreadsheet is the evidence behind it.
Allow about seventy-five minutes. You'll need the balanced model from lesson 7.8, Build the forecast and balance the model, and your WACC inputs from lesson 8.2, Cost of capital: equity, debt and a WACC you can defend. If your company is a bank or a REIT, use the methods in lesson 8.7 in place of steps 1 and 2.
Add a tab called Valuation. It must read free cash flow from your statement tabs, not from typed numbers, so that any change in a driver flows through to value per share. It needs a WACC with sources and dates, a terminal value by both methods, value per share, a sensitivity table and a reverse DCF at today's price, and a one-page note goes with it.
For each forecast year, calculate free cash flow to the firm from the statement tabs: operating profit times one minus the tax rate, plus depreciation, minus capital spending, minus the increase in working capital. Below it, a discount factor of one divided by one plus WACC, raised to the year number, and the present value of each year.
Marcus's Larkspur figures, made up and in S$ millions: free cash flow to the firm of about 32.4, 35.4, 38.3, 41.0 and 43.5 from FY6 to FY10. At a WACC of 9%, their present values sum to about 146.5.
Calculate the terminal value by the growth method and by the exit multiple, as in lesson 8.3, The terminal value problem and why it dominates the answer, and show the implied multiple and implied growth beside each.
Then build the bridge. Enterprise value is the sum of present values plus the discounted terminal value. Subtract net debt, and treat leases the same way your cash flows did. Divide by the share count.
Marcus's bridge, by the growth method at 2%: enterprise value about 558.6, minus net debt of 20, equity about 538.6, value per share about S$1.80 on 300 million shares. Terminal value is about 74% of enterprise value. The exit method at 7 times EBITDA gives about S$1.94 and implies long-term growth of about 2.6%.
Add the sensitivity table from lesson 8.6, Sensitivity tables and scenarios instead of one target price, with WACC down the side and long-term growth across the top. Add your bear and bull scenarios as separate copies of the inputs, with value per share for each.
Then run the reverse DCF from lesson 8.5, Reverse DCF: what the market is already pricing in, and record the growth the current price implies.
Marcus's results: a central range of about S$1.58 to S$2.08, from WACC of 8.5% to 9.5% and long-term growth of 1.5% to 2.5%; scenarios from about S$1.05 to about S$2.40; and an implied revenue growth of about 1% a year at S$1.60, against about 7.5% a year in the past.
The note has four short parts.
The value range and how it compares with today's price; the three or four assumptions that drive it most; what the current price implies; and the evidence that would change your mind
Keep it to one page. If it runs longer, you're explaining the method rather than the view, and the method lives in the spreadsheet.
Here is the core of Marcus's note. "On my base assumptions Larkspur is worth about S$1.60 to S$2.10 a share, against a price of S$1.60. The answer rests on three assumptions: an operating margin of 13.5% through a cycle, revenue growth fading from 8% to 3%, and keeping both of its two largest customers. At S$1.60 the market is pricing growth of about 1% a year, well below the company's record. My bear case, a downturn starting next year with margins at 11%, is worth about S$1.05, so there is no margin of safety against that outcome. I would change my view if a major customer moved meaningful volume to its second supplier, or if Larkspur's margin fell below 12% in a year when revenue held up, which would point to pricing pressure rather than the cycle."
Notice what it doesn't say. It doesn't say buy, sell or hold. It states a range, the assumptions behind it, what the market assumes instead, and what would prove it wrong. Module 9 tests this range against what similar companies trade at, and module 11 decides how much of the portfolio a holding with this range deserves.
A Valuation tab with linked free cash flow, a dated WACC, terminal value by both methods with each cross-check, value per share, a sensitivity table with today's price marked, bear and bull values, and a reverse DCF result. A one-page note with a range, the main assumptions, the implied growth and two things that would change your view. If your range sits entirely above or below today's price by a wide margin, recheck the share count, net debt and lease treatment first, because a large gap is more often a linking error than a discovery.
Now complete your valuation tab and write the one-page note with your value range, the implied growth at today's price and two things that would change your view.
Complete the valuation tab, then write a one-page note stating your value range, the implied growth at today's price and two things that would change your view.
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