When a company is not paying any dividends, the value is calculated by simply applying the discount rate on the projected cash flows from operations after tax.
While discounting, one has to calculate the profit after tax for the company for each of the years and then add back all the non cash elements of the expenses in the following manner:
Revenue from operations: XXXX
Add: Other revenue : XXXX
Total Revenue : XXXX
Less: Expenses: : XXXX
(Total of all expenses)
Net profit before tax : XXXX
Less: Tax @ X% : XXXX
Profit after tax : XXXX
Add: Non-Cash Expenses
Depreciation & Amortization : XXXX
(Add back any other similar expenses which do not involve any outflow of cash)
Cash Flows after tax : XXXX
Generally, this cash flow is discounted by the Weighted Average Cost of Capital of the company. It is calculated as follows:
Cost of equity X Equity/(Equity+Debt) + Cost of debt X Debt/(Equity+Debt)
Cost of Equity
Capital Asset Pricing Model is used to calculate the cost of equity in the following manner;
Where:
Where:
E(Ri) = Expected return on Equity
Rf = Risk-free rate of return
βi = Beta of asset i
E(Rm) = Expected market return
E(Ri) = Rf + βi * [E(Rm) – Rf]
Cost of Debt:
After tax cost of debt :
Cost of Debt x (1 – Tax Rate)
How do you determine the value, using discounted cash flows, of a company that pays no...
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