BS (A&F) Taleya Fatima, Farah Nadeem Khan, Ayesha Spring, 2020

Applicability of Free Cash Flow to Equity model for

equity valuation; evidence from Pakistan Tobacco
Company Limited

By

Taleya Fatima (02-112162-048)

Farah Nadeem Khan (02-112162-050)
Ayesha (02-112162-008)

A Project submitted to Department of Management Sciences,

Bahria University – Karachi Campus, in partial fulfillment of
the requirement for the BS (A&F) Degree

BS (Accounting & Finance)

Spring-2020
Bahria University, Karachi Campus

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Table of Content
Acknowledgment --------------------------------------------------------------------------------------------- 5
Abstract -------------------------------------------------------------------------------------------------------- 6
Chapter 1 – Introduction ----------------------------------------------------------------------------------- 7
Chapter 2 - Problem definition and requirement analysis ------------------------------------------ 9
2.1 Problem definition ------------------------------------------------------------------------------------ 9
2.2 Requirement analysis -------------------------------------------------------------------------------- 9
2.3 Literature review ------------------------------------------------------------------------------------ 10
Chapter 3 - Design and Implementation --------------------------------------------------------------- 12
3.1 Introduction of Company -------------------------------------------------------------------------- 12
Contribution to GDP ------------------------------------------------------------------------------------ 12
Product portfolio ----------------------------------------------------------------------------------------- 12
Major competitors --------------------------------------------------------------------------------------- 12
Market share of company and competitors -------------------------------------------------------- 12
3.2 Why do companies use Free Cash Flow to equity model? --------------------------------- 13
3.3 Design of Free Cash Flow to Equity (FCFE) model ----------------------------------------- 13
3.4 Implementation of Free Cash Flow to Equity Model (FCFE) ---------------------------- 14
Chapter 4 - Testing and Deployment ------------------------------------------------------------------- 16
4.1 Types of Free Cash Flow to Equity Model ----------------------------------------------------- 16
4.2 Testing of the model using the Two Stage Free Cash Flow to Equity Model ----------- 17
4.3 Growth Rates used in the calculations ---------------------------------------------------------- 17
4.4 Rate of return on equity ---------------------------------------------------------------------------- 17
4.5 (1) Projections and Present Value for the super normal growth period ----------------- 18
(2) Calculating the Terminal Value ------------------------------------------------------------------ 18
(3) Calculating the intrinsic value of the firm ------------------------------------------------------ 19
(4) Calculating the market value of the firm ------------------------------------------------------- 19
Chapter 5 – Future enhancements ---------------------------------------------------------------------- 20
Chapter 6 – Conclusion and Recommendation ------------------------------------------------------- 21
Appendices --------------------------------------------------------------------------------------------------- 22
References ---------------------------------------------------------------------------------------------------- 25

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 Acknowledgment

First, we are thankful to Allah, who is the holder of our breaths, without His orders nothing is
possible. In completing our project, we took help and guidelines of some respected people, who
deserve our appreciation and we are thankful to them. We would like to show our deepest
gratitude to Professor Akbar Saeed, Course Supervisor, Bahria University for giving us helpful
guidelines for this project through numerous online consultations. We are thankful to all those
who have directly and indirectly provided us with guidance us in completing this report. Our
project Co-Ordinator Ma’am Atiya as well as our Dean and our H.O.D who gave us this golden
opportunity to do this project on the topic “Applicability of Free Cash Flow to Equity model for
equity valuation; evidence from Pakistan Tobacco Company Limited”. This has also helped us
by the extensive research we undertook due to which we explored many more new things which
will be helpful in our practical and work life.
We would also like to thank our classmates who gave valuable comments and suggestions on
this proposal which inspired us to improve our report. We would also like to thank our parents
who helped and supported us during these hard times and motivated us a lot in finalizing this
project within the limited time frame. We thank all the people for their direct and indirect help
due to which we were able to complete our report.

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 Abstract

Performance measures that are modern and updated should provide an intrinsic value and value
for the owners/shareholders that is accurately assessed. The purpose of this is to optimize the
company’s guaranteed or immanent profit. For measures like discounted cash flow, price to cash
flow (or its inverse, the free cash flow yield) and other similar measures, free cashflow is the
starting point. The company’s ability of generating cash in future is reflected by The Discounted
Cash Flow (DCF) valuation method. In practice, a company’s main goal should be related to
generation of value for both the firm and its owners. This suggests that the investors are now more
enabled to value the companies efficiently owing to the rising importance of free cash flow
methodologies. The paper’s aim is to present an approach that is practical towards the company’s
discounted cash flow (free cash flow to equity) as a method of valuation.

The purpose of this study is to evaluate the intrinsic value of stocks from Pakistan Tobacco
Company Limited by performing fundamental analysis based on the financial performance of the
company for the period 2015-2019. The aim is to find out if Pakistan Tobacco Company Limited
is a good investment by comparing its intrinsic value per share with the current market price. The
calculation of intrinsic value was limited to only equity, estimated through Discounted Cash
Flow methodology using FCFE model using historical data. Investment potential is calculated
solely on estimated value of equity. Furthermore, the research can be considered as a stock
valuation guideline, more specifically, using Discounted Cash Flow method for readers who are
interested in investments in equity.

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 Applicability of Free Cash Flow to Equity model for equity
valuation; evidence from Pakistan Tobacco Company
Limited
Chapter 1 – Introduction

In the modern economy, corporations are not only involved in the exchange of services and
goods in the market but are themselves also exchanged through mergers and acquisitions.
Acquisition of a corporation as a whole or it is part through acquiring a block of shares has
become a common type of investment and is said to be the the globalization of financial markets.
This can also be seen by the huge number of mergers and acquisitions happening in recent years.
Therefore, it is taken as necessary by the current and future business owners to estimate the
business’ value. The board of directors, oversight bodies, controlling department, the supervisory
board, employees, etc. also want to know the value of the business as it is of their interest.
Having said this, the value of corporation can differ owing to standards of value that have been
adopted for valuation and most necessarily due to the valuation method adopted. Free Cash Flow
method of valuation is amongst the most popular methods not only in theory and literature but
also in practice.
According to studies, instead of net income and other performance measures, cashflows are the
primary determinant of the market value of listed companies. The slogan “It's all about cash” is
not just a statement, but a theoretical concept which has been proven by a lot of studies [Cornell
B., 1999, pp. 92-93]. Cash flow also represents if the company’s resources and equity, in cash
terms, are being effectively managed by the company’s corporate executives. Cashflows also
reflects the decisions that managers make on the source of financing, the decision on the funds’
usage, whether to invest it or use in operations, and the result of this decision. [Gołębiowski G.,
Szczepankowski P., 2007, p 133]. Free cash flow is also used to depict in cash terms the direct
financial benefit, without affecting the company’s activities, that the business owner can receive
in future. In other words, it depicts the cash that can be taken out from the business without
influencing the company’s going concern. [Malinowski U., 2001, p. 64].
In discounted cash flow valuation, first, the company’s future cash flows are projected and then
they are discounted by employing the net present value method to obtain the value of cash flows.
In the NPV method, the projections of annual cash flows are translated into amounts that are
today equivalent and then these amounts can be added up to depict comparable amounts that are
also current. Following requirements support the mentioned method of assessment (Weiss
&Majkuthova, 2006):
• There should not exist any transaction costs or market segmentation
• Homogeneous expectations should be there in the subjects of market
• Information should have no cost
• Cost of capital should be known
• The rate of tax, loan capital’s cost and the entrepreneurial risks have to be constant,
• Capital structure should determine the costs of own capital

In corporate finance, the availability of cash to the security holders for distribution can be known
by the free cash flow or free cash flow to the firm. The information of free cash flow is useful to
equity holders, debt holders, preferred stockholders, and convertible security holders as they are
interested in knowing the amount of cash that can be withdrawn from a company without
affecting its ability to conduct operations. An advantage of calculating free cash flow is its
depiction of the cash that remains after the deductions, that are necessary, have been made. The
option of spending this free cash flow then rests with the company. They can be paid as
dividends to shareholders of company, can acquire other companies with it, can buyback shares,
use for expansion of the business or just retain it. Whatever decision the company will take
would reflect how it sees its future. The company will build cash if it sees an upcoming
recession; it will go for acquisitions or share buy backs if it believes the economy to become

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strong in near future. The discounting of future cash flows to determine an enterprise’s value is a
characteristic for discounted cash flow methods. There are four common inputs that are
estimated in all DCF models:
• Cash flows generated by assets that exist at the time of valuation
• An expected rate of growth in cash flows
• A horizon value which is the value of the firm when it is in stable growth phase
• A rate to discount the projected cash flows
A single firm does not mean an individual project but several different projects that start and end
at different times. It is easier to apply the rule of NPV to an individual project. However, the free
cash flow concept refers to applying the NPV rule as a firm wide application of it for valuing a
project. In this concept, a present value is calculated by adding up the discounted cash flows and
then the initial investment is subtracted from the PV. When it comes to calculating the intrinsic
value of the firm, DCF is the most widely accepted and used method. Once the NPV and
terminal value of the scenario period is determined, the terminal value’s NPV is calculated by
discounting it whether the valuation model measures FCFF - free cash flow to the firm or FCFE -
free cash flow to equity. FCFF refers to the cash flow which is available to the capital suppliers
of the firm after paying off the operating expenses and after making necessary investments in
fixed capital and working capital. Common shareholders, preferred shareholders and
bondholders are the firm’s suppliers of capital. The cash flow to all the holders of capital in a
corporation is the free cash flow to the firm. Free cash flow to equity refers to the amount of cash
flow that is available to the equity stockholders after all the costs of operating, expansion and
growth, and financing costs of the firm have been taken care of. The value of equity shares can
be computed using this amount as it is the same amount which is expected to be paid to equity
shareholders. The cash flow that remains after reinvestment needs are met and debt payments are
made is called free cash flow to equity. This cash flow will return a more realistic value of the
firm as it can be paid out as dividends.

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 Chapter 2 - Problem definition and requirement analysis

2.1 Problem definition

In this study we will provide a comprehensive example of how free cash flow to equity valuation
model can be applied to a company to determine its intrinsic value and then compare it with its
market value to check if the firm’s share is underpriced or overpriced.
Intrinsic value of equity securities is estimated to confirm how accurate the market price is as an
estimate of value of the security. Estimating the intrinsic value usually comes into play in active
equity portfolio management as its goal is to improve on the risk-return trade-off of a portfolio’s
benchmark by identifying the securities that are mispriced.
Free-cash-flow-to-equity model is one of the present value models. In these models, intrinsic
value is estimated as the present value of the future benefits that are expected to be received from
the security. In the FCFE model, benefits are defined as the cashflows that are available to be
distributed to shareholders after setting aside the capital expenditures and working capital needs.
Many analysts, in practice, prefer to use a FCFE valuation model. They are of the school of
thought who believe that cash flow estimates should reflect the dividend paying capacity rather
than expected dividends. FCFE measures the dividend paying capacity. FCFE valuation models
can therefore also be used for non-dividend paying stocks. Our selected stock is however a
dividend paying stock.

2.2 Requirement analysis

Cash flow from operations (CFO) is the first step in calculating FCFE. It is computed by adding
the non-cash expenses and subtracting investment in working capital.
FCFE measures the cashflow generated in a period which is available for distribution to common
shareholders. ‘Available for distribution’ refers to the cashflow after the amount from CFO
needed for fixed capital investment has been set aside. It is not included since it’s needed for the
maintenance of the value of the corporation as a going concern and hence is unavailable to be
distributed to common shareholders.
Net amounts borrowed are available for distribution to common shareholders, hence are a part of
FCFE.
FCFE can therefore be expressed as defined by (Damodaran, 2006)

FCFE = CFO – Fixed Capital Investment + Net borrowing

The above-mentioned information to calculate historical FCFE is present in a company’s

statement of cash flows and financial disclosures. Owing to the assumption that management acts
in the interest of company to maintain its value as a going concern, the capital expenditure is
assumed as a representative of Fixed Capital Investment.
Projecting the financials must be done for the future FCFE forecasts. In FCFE valuation
expected future FCFE is discounted by the required rate of return on equity. Following is the
formula for current value developed by Rich Jakotowicz CFA, CPA:

∞
𝐹𝐶𝐹𝐸𝑡
𝑉0 = ∑
(1 + 𝑟)𝑡
𝑡=1

Terminal value is the value after the projections period. To calculate the terminal value, we will
use the following sustainable growth rate formula (Damodaran, 2002) ROE represents Return on
Equity and 1-DPR is the retention ratio.

SGR = ROE (1-DPR)

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Capital Asset Pricing Model (CAPM) is often used to estimate the required rate of return on a
share. Following is the formula for it:

Required rate of return on share = Current expected risk-free rate of return +

Beta*[Market (equity) risk premium]

Here the required rate of return on a share is the sum of the current expected risk-free rate plus a
risk premium which is the product of the stock’s beta and the market risk premium (the expected
return of the market in excess of the risk-free return, in practice, the “market” is often
represented by a broad stock market index).

After computing the intrinsic value by above formulas, we will compare it with the market value
which is the product of the number of shares outstanding and the market price per share.

2.3 Literature review

This section of study will highlight in detail the related literature and empirical evidence
regarding equity valuation through FCFE model.

In corporate finance, free cash flow or free cash flow to the firm, depicts a business's cash flow
which tells the availability of amount for distribution amongst securities holders of a firm. This
information can be used by equity holders, preferred shareholders, debt holders, and convertible
security holders to see how much cash can be taken out from a company without causing
interference in its operations. Free cash flow calculation is calculated so that it represents the
amount of cash which is left over after all the essential deductions are made. Companies can then
choose how free cash flow is spent. Companies can pay it to stockholders as dividends, use it to
acquire other companies, use it for buying back shares, and use it for investment of capital in the
business, or can retain it. The way a company chooses to spend its free cash flow reveals about
how it sees its future. It may build cash, if it fears a recession; if the company views the economy
to become strong, a share buy-back or a big acquisition can be undertaken. (Rupić, 2017)
The stock price of a company represents the value of stockholder. Although, the value of
corporation and the value of stock are different measures, their goal is however similar which is
maximizing the market value added (MVA). It is defined as the gap between the market value
and the book value of the company for both corporate value and stockholder value. The value of
stockholder is dependent on income stream earned by investors of that stock and the risk present
in that stream of income. The managers therefore require having knowledge of how different
steps will affect the stock prices. (Trinh and Thao, 2017)

It is assumed by the discounted cash flow methodology that the present value of future cash
flows to the company shareholders is equal to the present range of values of the company as of
the valuation date. Discounted cash flows in the projected period is obtained by adding all the
normalized cash flows which is then multiplied by the cumulative discount factor for each year
of the financial projection period. Due to the limitation of the period of the financial projections
the value of the firm is a sum of two factors:

• The present value of cash flows.

• Terminal (residual) value of the company, the present value of the company representing the
cash flows after the projected period which are generated by the company. (Janiszewski, 2011)

The DCF method works despite of the accounting principles of the firm and is intuitively easy to
understand. (Morris, 1994; Penman, 2010)

With a positive free cash flow, a company can pay interest, dividends, redeem shares, and
achieve business growth. If the company has insufficient free cash flow (FCF), it can force the

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company to borrow more so that it can be liquid and can maintain the company as a going
concern. Free cash flow is utilized for business activities, financial activities and investment
activities of a company. (Stančić, 2005)

(Al Zararee and Alzzaw, 2014) examined the relationship between free cashflow to equity and
market value of Hikma Pharmaceuticals. Their results showed that the market values of a firm
are assessed by FCFE and the result was in accordance with the hypothesis that FCF to Equity
has significant positive effect on the stock market.

Each asset has its own cashflows. The estimated cashflows' riskiness is determined by the
discount rate used. The riskier the asset, the higher the discount rate would be and the less risky
and safer the asset, the lower the discount rate would be. (Damodaran, 2002)

In understanding valuation, it is relevant to know if there can be an accurate prediction of the

future investment levels, to know the method to measure the discount rate, what time period
should be used for the assessment of value, and if the current earning figure should be accepted
or not. In discounted cashflow approach, the main problem centers on these above-mentioned
key variables in the model. (Neale & McElroy, 2004)

In investment's valuation, the process of estimation of value, is a representation of its expected

returns' present value during the period of investment. Valuation of equity or stock refers to the
estimation of the common stock's intrinsic value. The discounted cashflow methodology is a
theoretical principle which is commonly accepted for valuation of any financial asset. (Reily and
Brown, 2012)

When all the futures cashflows of an asset are discounted at an opportunity rate that is reflective
of the investment's risk, these cashflows are then equal to the value of that asset (Pratt, 1998).

Investment decisions are supported by taking the fundamental approach of the valuation process.
It can be determined that whether one should invest or not by comparing the investment's market
value to the calculated intrinsic value/estimated value of an investment. If the intrinsic value is
greater than the market value, then the investor should buy it or hold it if he already owns it. If
the estimated intrinsic value is less than the market price then the investor should not buy it or
sell it if he already owns it (Reilly and Brown, 2012).

The valuation of an asset involves uncertainties related to the future as the projections are made
from estimates and are therefore subjective and imprecise. Equity valuation models specifies that
which values are to be forecasted and translated into the intrinsic value estimate. The three major
valuation techniques which are widely used are
1. Asset based valuation
2. DCF valuation
3. Relative valuation
(Froidevaux, 2004)

The DCF model can be used to value a business by valuing it as a supposed portfolio of assets.
The value of equity and the value of firm are two ways to value a business. Value of equity is
representative of the company's stake that belongs to common shareholders. In this approach,
FCFE is discounted at the cost of equity which is also the required rate of return by equity
investors. To value a firm, free cash flow to the firm is discounted at the business's weighted
average cost of capital which considers the cost of all financing components which are weighted
by their market value proportion. This approach is different from valuing a business through
equity as it also considers the leverage used by the firm to finance its business and is discounted
by WACC instead of the required return on equity. (Damodaran, 2004).

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 Chapter 3 - Design and Implementation

In this section of the report, we will discuss the design and implementation of Free Cash flow to
equity model (FCFE) on the information provided by the financial statements of Pakistan
Tobacco Company Limited to get the desired outcome.

3.1 Introduction of Company

Pakistan Tobacco Company Limited is a Pakistani tobacco manufacturing company, a subsidiary

of British American Tobacco. It was established in 1947, right after partition.
It is headquartered in Islamabad, Pakistan and has two factories which are located in Akora,
Khattak and Jhelum.
Latest company annual report shows that over 94 percent of PAKT shareholding continues to
rest with British American Tobacco (Investments) Limited, with the remaining shares held by a
variety of investors, including investment companies, banks, insurance companies, mutual funds
and the general public.

Contribution to GDP
Approximately Rs 88 billion has been contributed by the tobacco sector on account of Federal
Excise Duty (FED) and Sales Tax in 2017-18.

Product portfolio
There are 3 products under Premium product line:
1. Dunhill
▪ Dunhill
▪ Dunhill Switch
2. Gold Leaf
▪ John Player Gold Leaf
▪ John Player Gold Leaf Special
3. Bensen and Hedges
▪ Bensen and Hedges (Red)
▪ Bensen and Hedges (Blue)
There are 3 products under Aspirational premium product line:
1. John Player
2. Capstan Filter
3. Wills International
There are 3 products under Value for Money product line:
1. Capstan by Pall Mall
2. Gold Flake
▪ Gold Flake
▪ Gold Flake Soft Cup
3. Embassy

Major competitors
1. Philip Morris (Pakistan)Ltd.
2. Khyber Tobacco Co. Ltd.

Market share of company and competitors

1. Pakistan Tobacco Company Limited - Market leader with 71% of market share in the
legitimate cigarette market as of 2018.
2. Philip Morris (Pakistan)Ltd - Roughly 20% share of the organized market.
3. Khyber Tobacco Co. Ltd. and other small players are included in the remaining market share.

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 Business Sustainability
PTC has a multi-category portfolio of products which meets the evolving preferences of its
customers and continuously outperform the competition and is expected to do so in the long run
as well. The operations of PTC have become highly efficient which has enabled it to respond to
the changing industry demands.

3.2 Why do companies use Free Cash Flow to equity model?

Free cash flow to equity (FCFE) model became popular as a substitute of dividend discount
model (DDM), especially in the case when the company is not paying dividends. Although FCFE
model equates the amount that will be available to equity shareholders, it still does not calculate
the amount that will be paid out to them as dividends.
FCFE model is also used by the analyst to determine whether the dividend payments and stock
repurchases are paid with the free cash flow to equity or some other form of financing. Investors
are also interested in the dividend payment and stock repurchases that are fully financed with
FCFE.
According to some analyst if the company’s dividend payment is significantly lower than its free
cash flow to equity, then the firm is using the excess money to increase its cash level or it is
investing in marketable securities to earn risk less return. On the other hand, if the funds spent to
buy back shares and pay dividends is almost equal to the free cash to equity, then the company is
paying all its funds to its investors.

3.3 Design of Free Cash Flow to Equity (FCFE) model

We completed our project design by the evidence extracted from Pakistan Tobacco Company
Limited financial statements.
Free Cash flow to equity model (FCFE) is used in calculating the value of equity. Therefore, the
major stakeholder of our project is the shareholder of Pakistan Tobacco Company Limited and
most importantly a “common equity shareholder”.
In practice, the objective of Free Cash flow to equity model (FCFE) is to show how much cash
can be distributed to the equity holders of the company as dividends or stock buybacks after all
the expenses such as non-cash expenses (depreciation and/or amortization) , capital expenditures,
debt repayments and working capital requirements have been taken care off. (Stowe, Robinson,
Pinto, & MeLeavey, 2002).
We begin with the net income which is the accounting measure of the stockholders’ earning
during the period. After that we add any non-cash expenses such as depreciation and
amortization to the net income. Capital expenditures such as purchases of property, plant and
equipment or acquisitions are subtracted from the net income since they represent cash outflows
during a period. Changes in Working capital amounts are added or subtracted depending on the
value which is derived in that year. Increases in working capital drains firm’s cashflows and so it
is subtracted from net income. When working capital is decreased it increases the availability of
cash to equity investors therefore it is added back in net income. Pakistan Tobacco Company
Limited has a highly growing business due to which it has high working capital requirements.
Debt repayments means repayment of the principal or existing debt and this indicates an outflow
of cash. Pakistan Tobacco Company Limited is a solely equity financed company and any debt
portion represents short term debt obligations which are ignored in the calculation of Free Cash
flow to equity model (FCFE).
After considering these cash flow effects of net capital expenditures, changes in working capital
and debt (Damodaran, 2002), we have defined the cash flow left over after these changes as the
free cash flow to equity (FCFE).
Free Cash Flow to Equity (FCFE) = Net Income - (Capital Expenditures - Depreciation)
- (Change in Non-cash Working Capital)
+ (New Debt Issued - Debt Repayments)
This cash flow is available to be paid out as stock buybacks or dividends.

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What about preferred dividend?

Since the equity that we value is attributable to common equity shareholders in Pakistan Tobacco
Company Limited, therefore in such a model we have not considered the effect of preferred
dividends.

3.4 Implementation of Free Cash Flow to Equity Model (FCFE)

The requirements of discounted free cash flow to equity model for valuation are (Rodić &
Filipović, 2010):
• Projecting the free cash flow to equity,
• Calculation of discount rate (return on equity),
• Calculating present value of the projected cash flows,
• Estimating the growth rate,
• Computation of residual value of firm,
• Calculating present value of residual value of firm,
• Summing up the discounted value of cash flows and the discounted value of the residual to
obtain the value of the equity.

Before these above-mentioned steps, we have gathered information of 5 years from 2015 – 2019
of Pakistan Tobacco Company Limited to derive free cash flow to equity. Following components
have been used in the implementation of FCFE Model:

(1) Net income for the year

Years 2019 2018 2017 2016 2015

Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000

Net Income 12,889,229 10,337,992 9,573,562 10,361,352 7,046,434

(2) Depreciation

These values have been extracted from the Operating Assets schedule.

Years 2019 2018 2017 2016 2015

Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000

Depreciation charge 1,570,029 975,551 1,168,680 1,133,063 1,060,491

(3) Changes in working capital

Working capital is calculated by subtracting current liabilities from current assets. Current assets
include stock in trade, stores and spares, trade debts, loans and advancements and short-term
prepayments. Current liabilities include trade and other payables and other liabilities. It is shown
in Appendix 1.

Years 2019 2018 2017 2016 2015

Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000
Working capital -5,294,574 2,953,724 2,665,773 1,474,143 -3,299,925
changes

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(4) Cash Flow from Operations

We calculated Cash Flow from Operations by adjusting the Net income for depreciation – a non-
cash expenditure and added to it the changes in working capital.

Cash Flow from

2019 2018 2017 2016 2015
Operations
Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000
Net Income 12,889,229 10,337,992 9,573,562 10,361,352 7,046,434
Adjustment non-
cash items - 1,570,029 975,551 1,168,680 1,133,063 1,060,491
Depreciation
Changes in working
-5,294,574 2,953,724 2,665,773 -1,474,143 -3,299,925
capital
Cash Flow from
19,753,832 14,267,267 13,408,015 12,968,558 11,406,850
Operations

(5) Capital expenditure

These values are extracted from the Statement of cash flow from the line item ‘purchases of
property, plant and equipment’ as well as addition of advances for the capital expenditures i.e.
Advance for CAPEX.

Years 2019 2018 2017 2016 2015

Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000
Capital expenditure 1,947,345 2,275,139 1,162,779 579,413 1,490,676

(6) Net Borrowing

Pakistan Tobacco Company is an all equity financed company with no Long-term debt in their
capital structure. Hence there exists no Net Borrowing.

Years 2019 2018 2017 2016 2015

Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000
Net 0 0 0 0 0
Borrowing

Application of these components have been discussed in detail in the following chapter to have a
clearer understanding about FCFE model.

15
 Chapter 4 - Testing and Deployment

In this chapter we would be testing the model and generating the value of Free Cash Flow to
Equity (FCFE) by implementing the data mentioned in the previous chapter.

4.1 Types of Free Cash Flow to Equity Model

Different companies use different FCFE models depending on their needs and data available. In
practice there are 3 types of FCFE models:

A. Single Stage or Constant Growth Free Cash Flow to Equity Model

This model is usually used in international valuations or by the multinational companies which
are prone to high inflation. This approach is a variation of a Gordan Growth Model. In this
model, due to the inflation factor, real cash flows, real growth rates and real required rates of
returns are used to minimize the effect of inflation and other international differences. Therefore,
value of the firm is calculated by the following formula (Damodaran, 2002):

V0 = (FCFE0 * (1 + Growth ratereal))/ (rreal-greal)

where,
V = value of the firm
rreal = Real cost of equity of the firm
greal = Real growth rate in FCFE for the firm
This model is appropriate to use when the firm is the steady state, capital expenditures are not
significantly greater than depreciation and the beta of the stock is closer to 1 or below 0.

B. The Two Stage Free Cash Flow to Equity Model

This model is used relatively in mature firms or when the firm is expected to grow much faster
than a stable firm in its initial period and at a stable rate thereafter. In this the value of the firm is
calculated by the following formula (Damodaran, 2002):
Value = Present value of FCFE + Present value of the terminal price
FCFEt Pn
Value = ∑ (1+K t
+
e) (1+Ke )n
where,
FCFEt = Free Cash flow to Equity in year t
Pn = Price at the end of the extraordinary growth period
Ke = Cost of equity
The terminal price is usually calculated using the infinite growth rate model,
FCFEn+1
Pn = r−gn
where,
g n = Growth rate after the terminal year forever
This model is appropriate to use when there may be no negative cash flows, or the growth of the
cash flows may be expected to change due to changes in the business cycles.

C. The Three Stage Free Cash Flow to Equity Model

This model is used for valuation of firms which are expected to experience three stages of
growth - an initial phase of high growth rates, followed by a transitional period in which the
growth rate starts to decline and a period of steady state wherein the growth becomes stable.

16
4.2 Testing of the model using the Two Stage Free Cash Flow to Equity Model

For testing of the Pakistan Tobacco Company Limited’s valuation of free cash flow to equity, we
have used the Two Stage FCFE Model as there are no negative cash flows in the years for which
our testing is applied as well as the growth in cash flows is constantly changing.
Continuing the calculations, we have used in the implementation phase of the project we have
derived the following results:

Free Cash Flow to Equity

We calculated FCFE by subtracting the capital expenditures from CFO and added to it the Net
borrowing which was zero.

2019 2018 2017 2016 2015

Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000
Free Cash Flow
17,806,487 11,992,128 12,245,236 12,389,145 9,916,174
to Equity

After calculating the FCFE, the average of FCFE from 2015 to 2019 will be taken:
=17,806,487 + 11,992,128 + 12,245,236 + 12,389,145 + 9,916,174 / 5
= Rs. 12,869,834 thousand
This value of Rs. 12,869,834 thousand have been used for cashflow projections.

4.3 Growth Rates used in the calculations

SGR
We have calculated the Sustainable Growth Rate = 14.8% by the following formula:
SGR = ROE*(1-DPR)
Where,
• ROE = represents return on equity. This has been calculated by dividing Net Income with the
shareholder’s equity for each year.
• DPR = represents dividend payout ratio. This has been calculated by dividing dividend per
share with the earnings per share for each year.
SGR was calculated by taking the average of the growth rates for a period of 5 years and this is
used to project the cashflows for the years 2020 and 2021.
The table in Appendix 3 shows the calculations of this rate.

Long Term Growth rate

7.15% was assumed as the Long-Term Growth Rate.

4.4 Rate of return on equity

Requity
We calculated the cost of equity with the help of the capital asset pricing model (CAPM). The
CAPM (Steiger, 2008) generates the required return by those who invest in a company’s share
for bearing the risk of keeping the share. This required return is equivalent to the company’s cost
of equity as it is the return on equity that investors ask for to bear the risk of holding the share of
company.

Requity = Rfr+ β (Rm - Rfr)

Where,
Rfr = Risk Free Rate – Interest Rate on Government T-bills/bonds
Β = Beta – a measure of systematic risk
Rm = Expected return on the market portfolio (calculation shown in Appendix 2.1)
Requity = 0.0933

17
This value of 9.33% will be used to discount the projected cash flows.
The table in Appendix 2.2 shows the calculations of this rate.

4.5 (1) Projections and Present Value for the super normal growth period

2020 2021
Rs. ‘000 Rs. ‘000
Projected FCFE 14,778,339 16,969,862
PV2019 13,517,327 14,197,397

The cashflows were projected at the sustainable growth rate of 14.8% and their Present Value
was calculated by discounting them at the required return on equity which was 9.33%. We
assumed that the super normal growth period will last 2 years.

(2) Calculating the Terminal Value

The value of the company calculated beyond the forecast period is called the terminal value. It is
practically not possible to predict the future long-term cash flows when the projection period is
ended. That is why we calculate the terminal value. It can be calculated using two methodologies
under the going concern assumption. These methodologies are mentioned below:

• Constant growth FCFE model: The constant growth FCFE model was made for valuation of
businesses that are in a steady state and grow at a rate which is stable. It assumes that the
business will keep on growing in the foreseeable future and earning greater than its cost.
Discounting free cash flow to Equity when discounted at the Required rate of return on equity,
results in the value of the equity of the firm. If the FCFE is growing at a constant rate then the
value of the equity is (Damodaran, 2002):
𝐹𝐶𝐹𝐸 ∗ (1 + 𝑔)
𝐸𝑞𝑢𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒 =
𝑅𝑒𝑞𝑢𝑖𝑡𝑦 − 𝑔
• Exit multiple: When market multiple basis is being used to value a firm, the exit multiple
approach is used. The determination of value is usually done based on EBIT (Earnings Before
Interest and Taxes) or EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization) multiples. An industry multiple is used which is a normalized multiple that has
adjustments for cyclical variations. (Rupić, 2017)
To calculate the terminal value of Pakistan Tobacco Company, we have used the Constant
growth FCFE model. Free Cash flow to Equity for 2022 was projected at the long-term growth
rate of 7.15% and the terminal value was calculated by the following formula:
FCFE2022
Terminal Value2021 =
R equity − Long term growth

This was then discounted to PV2019 by Requity i.e. 9.33%

Rs ‘000
FCFE2022 15,212,510
Terminal Value2021 698,188,877
PV2019 of Terminal
584,121,700
Value2021

18
(3) Calculating the intrinsic value of the firm

Total Value
PV of FCFE 27,714,724,000

PV of Terminal Value 584,121,700,000

Intrinsic Value 611,836,424,000

Intrinsic Value per share 2394.72

Thus, the intrinsic value of Pakistan Tobacco Company Limited as of 2019 is the sum of the PV
of two anticipated Free Cash Flow to Equity and the PV of the terminal value of the firm. The
discounted present value of the Free Cash Flow to Equity for the super-normal growth period of
two years, 2020 and 2021 is Rs. 27,714,724 thousand and the present value of the terminal value
is Rs. 584,121,700 thousand. Hence, the intrinsic value of Pakistan Tobacco Company is Rs.
611,836,424 thousand and the intrinsic value per share is Rs. 2394.72 The table in Appendix 4
shows the calculations of intrinsic value.

(4) Calculating the market value of the firm

Market price per share = Rs. 2440.55

Number of shares = 255,493,792
Market Value = Rs. 623,545,374,066

Market price per share of Pakistan Tobacco Company Limited (PAKT) in 2019 stood at Rs.
2440.55 as mentioned in its Financial Statements.

The difference between the market price per share and intrinsic value per share is of Rs. 45.83.
This tells us that the share of Pakistan Tobacco Company Limited is overvalued in the market by
Rs.45.83.

19
 Chapter 5 – Future enhancements

We have calculated company’s value through free cash flow model that involved a lot of
research and assumptions. By prior literature and textbooks, we have assumed and estimated
several values and methods.

Our future enhancement involves the calculation of Intrinsic Value through different models of
equity valuation which would add support to our calculated intrinsic value through Free Cash
Flow to Equity model. We are highly optimistic that we will continue our work in our higher
studies thesis report and will reveal new methodological findings and seek to establish new
metrics for firm’s equity value calculation.

20
 Chapter 6 – Conclusion and Recommendation

Cash flows are valued by three common approaches such as:

1. Corporate FCF Valuation Model
2. Free Cash Flow to Equity Model
3. Asset Approach to Valuation Model

In our project we chose to value cash flows by Free Cash flow to equity model. According to all
the above-mentioned factors, Free cash flow to equity is aimed at valuing the equity of Pakistan
Tobacco Company Limited. We chose this model due to several advantages attached to it.
Valuing free cash flow to equity by discounting is beneficial as the financial statements are
presented in detail and include the information of all the future funds that would be inflows and
outflows. This is one way of how the projected balance can represent actual future balances. The
terminal value is more realistic when the results of estimates are based on projected cash flows.

However, if the cash flows are not projected properly the benefit mentioned above may also turn
into a limitation of the free cash flow to equity model. The limitation is that it is difficult to
predict the structure of financial sources to be used by a corporation. The difficulty is reflected
due to outstanding debt repayment plans as well as the projection of new debt. However, for
Pakistan Tobacco Company Limited this was not a problem as it as an equity financed company.
The disadvantage of using free cash flow to equity model is that the value of the firm can be too
low if the capital expenditures are too high in comparison to depreciation, working capital as a
percentage of revenues is too high or beta is high for a stable firm. In such a case we must use
two stage free cash flow to equity model as we have used in our analysis of Pakistan Tobacco
Company Limited. Furthermore, we can use smaller capital expenditures for projections.

On the other hand, if we get a value which is too high it can be because the capital expenditures
are lower than depreciation, working capital ratio as a percentage of revenue is negative or is
equal to zero as well as expected growth rate is too high for a stable firm. In such a case, the firm
must estimate a reinvestment rate, use a beta which is closer to 1 or can use a growth rate which
is less than or equal to GNP growth rate.

Pakistan Tobacco Company Limited’s Free cash flow is expected to grow at 7.15% after the
forecast period as shown in appendix 4. The total intrinsic value of Pakistan Tobacco Company
Limited is Rs. 611,836,424,000. However, this value will be of no use if it is not compared with
the market value. Market value of Pakistan Tobacco Company Limited is Rs. 623,545,374,066.
The closer the intrinsic value is to the market value, the more accurate our predictions for the
future will be. Difference of Rs.45.83 exists between the market value of Rs. 2440.55 per share
and the intrinsic value of Rs. 2394.72 per share. This difference can exist due to many factors
such as use of assumptions and other constraints such as estimation of beta and growth rates
used, and limited time frame taken in our analysis. This overvaluation in the market by Rs.45.83
can also be attributed to external regulatory environment which is working in favor of the
company as the Government revived Inland Revenue Enforcement Network (IREN) in late 2019
that can eradicate the undocumented sector which is violating most of the existing regulations.
This would bring back the lost volumes and increase the company’s profitability and investor’s
returns in future. This expectation of increased returns can also justify the seemingly overvalued
market price.

Nevertheless, considering all the above factors and advantages associated with Free Cashflow to
Equity model when valuation of firms is done for mergers and takeovers or in valuation of firms
where the change of corporate control stands a reasonable chance, the value of the firm is better
estimated by the FCFE model.

21
 Appendices

Appendix 1

Changes in
2019 2018 2017 2016 2015
working capital

Stock in trade (2,940,355) (4,018,990) (834,448) 368,431 (2,043,029)

Stores and spare (45,093) 23,971 11,893 93,570 (286,546)

Trade Debts (2,707) 1,083 (797) (933) 2,319

Loans and
(27,684) (25,275) 105,876 3,033 (114,902)
advances

Short term
234,014 (37,188) (28,889) (13,560) 12,847
prepayments

Other Receivable (181,189) (884,657) (43,577) (602,626) (21,155)

Trade and other

(2,898,684) 7,695,567 2,402,505 (1,322,058) (849,459)
Payables

Other Liabilities 567,124 199,213 1,053,210 - -

(5,294,574) 2,953,724 2,665,773 (1,474,143) (3,299,925)

Appendix 2

2.1
We calculated return by the formula = (current price – old price)/old price
Rm is the average of returns of KSE 100 index

KSE-100 Weekly Price

Date Price Return Date Price Return Date Price Return
Dec 29, 2019 42,323 3.61% Dec 23, 2018 37,167 -2.83% Dec 31, 2017 42,524 5.07%
Dec 22, 2019 40,849 0.04% Dec 16, 2018 38,251 -0.87% Dec 24, 2017 40,471 2.65%
Dec 15, 2019 40,833 -0.20% Dec 09, 2018 38,586 0.06% Dec 17, 2017 39,428 2.02%
Dec 08, 2019 40,917 4.15% Dec 02, 2018 38,562 -4.78% Dec 10, 2017 38,646 -1.11%
Nov 24, 2019 39,288 3.59% Nov 25, 2018 40,496 -0.91% Dec 03, 2017 39,080 -2.33%
Nov 17, 2019 37,926 0.91% Nov 18, 2018 40,869 -1.90% Nov 26, 2017 40,010 -0.59%
Nov 10, 2019 37,584 4.46% Nov 11, 2018 41,661 0.66% Nov 19, 2017 40,248 -1.46%
Nov 03, 2019 35,978 4.66% Nov 04, 2018 41,389 -1.46% Nov 12, 2017 40,844 -1.43%
Oct 27, 2019 34,378 1.50% Oct 28, 2018 42,004 3.57% Nov 05, 2017 41,436 0.91%
Oct 13, 2019 33,870 -1.76% Oct 21, 2018 40,556 5.53% Oct 29, 2017 41,064 -0.10%
Oct 06, 2019 34,476 4.37% Oct 14, 2018 38,430 2.43% Oct 22, 2017 41,105 -2.33%
Sep 29, 2019 33,033 11.33% Oct 07, 2018 37,518 -4.36% Oct 15, 2017 42,088 5.62%
Aug 25, 2019 29,672 -6.30% Sep 30, 2018 39,226 -4.32% Oct 08, 2017 39,847 -6.04%
Jul 28, 2019 31,666 -1.36% Sep 23, 2018 40,999 -0.78% Sep 24, 2017 42,409 -0.88%
Jul 21, 2019 32,103 -6.10% Sep 16, 2018 41,320 0.98% Sep 10, 2017 42,787 3.35%
Jun 30, 2019 34,190 0.85% Sep 09, 2018 40,920 0.16% Sep 03, 2017 41,401 0.47%
Jun 23, 2019 33,902 -3.48% Sep 02, 2018 40,855 -2.13% Aug 27, 2017 41,207 -3.36%
Jun 16, 2019 35,125 -1.26% Aug 26, 2018 41,742 -1.99% Aug 20, 2017 42,642 -9.04%
Jun 09, 2019 35,573 -1.12% Aug 19, 2018 42,588 -0.59% Jul 30, 2017 46,877 5.73%
May 26, 2019 35,975 0.76% Aug 05, 2018 42,842 0.79% Jul 09, 2017 44,337 -1.96%
May 19, 2019 35,704 7.65% Jul 29, 2018 42,505 -0.66% Jul 02, 2017 45,222 -2.88%
May 12, 2019 33,167 -8.18% Jul 22, 2018 42,786 3.80% Jun 25, 2017 46,565 -0.63%
Apr 28, 2019 36,123 -2.71% Jul 15, 2018 41,222 2.36% Jun 11, 2017 46,859 -5.39%

22
Apr 21, 2019 37,131 -0.43% Jul 08, 2018 40,271 -0.03% Jun 04, 2017 49,527 2.00%
Apr 14, 2019 37,292 -0.12% Jul 01, 2018 40,284 -3.88% May 28, 2017 48,555 -7.75%
Apr 07, 2019 37,338 -0.49% Jun 24, 2018 41,911 0.66% May 21, 2017 52,637 3.73%
Mar 31, 2019 37,522 -2.92% Jun 17, 2018 41,637 -5.26% May 14, 2017 50,742 -1.95%
Mar 24, 2019 38,649 0.30% Jun 03, 2018 43,948 2.41% May 07, 2017 51,751 3.81%
Mar 17, 2019 38,532 0.59% May 27, 2018 42,913 1.99% Apr 30, 2017 49,851 1.12%
Mar 10, 2019 38,307 -1.65% May 20, 2018 42,074 1.08% Apr 23, 2017 49,301 -0.82%
Mar 03, 2019 38,950 -1.49% May 13, 2018 41,624 -4.52% Apr 16, 2017 49,709 4.48%
Feb 24, 2019 39,539 -1.19% May 06, 2018 43,595 -2.12% Apr 09, 2017 47,577 -0.65%
Feb 17, 2019 40,016 -1.16% Apr 29, 2018 44,537 -2.21% Apr 02, 2017 47,889 -0.55%
Feb 10, 2019 40,487 -0.98% Apr 22, 2018 45,543 0.63% Mar 26, 2017 48,156 -1.66%
Feb 03, 2019 40,887 -0.55% Apr 15, 2018 45,259 -1.76% Mar 19, 2017 48,971 1.16%
Jan 27, 2019 41,113 4.60% Apr 08, 2018 46,072 -1.21% Mar 12, 2017 48,409 -1.59%
Jan 13, 2019 39,307 0.66% Apr 01, 2018 46,638 2.36% Mar 05, 2017 49,192 -0.87%
Jan 06, 2019 39,049 4.00% Mar 25, 2018 45,560 1.18% Feb 26, 2017 49,624 1.26%
Mar 18, 2018 45,030 3.84% Feb 19, 2017 49,008 -0.74%
Mar 11, 2018 43,363 0.82% Feb 12, 2017 49,376 -1.10%
Mar 04, 2018 43,011 -1.67% Feb 05, 2017 49,925 0.75%
Feb 25, 2018 43,740 1.09% Jan 29, 2017 49,556 -0.82%
Feb 18, 2018 43,267 -0.82% Jan 22, 2017 49,964 1.21%
Feb 11, 2018 43,627 -1.52% Jan 15, 2017 49,365 0.31%
Jan 28, 2018 44,301 -0.56% Jan 08, 2017 49,211 0.35%
Jan 21, 2018 44,551 0.84% Jan 01, 2017 49,038 2.58%
Jan 14, 2018 44,179 2.90%
Jan 07, 2018 42,934 0.96%
Dec 25, 2016 47,807 2.52% Dec 27, 2015 33,229 2.24%
Dec 18, 2016 46,634 0.11% Dec 20, 2015 32,501 -0.84%
Dec 11, 2016 46,585 2.64% Dec 13, 2015 32,777 -0.82%
Dec 04, 2016 45,387 4.89% Dec 06, 2015 33,049 1.04%
Nov 27, 2016 43,271 0.63% Nov 29, 2015 32,708 -0.77%
Nov 20, 2016 43,000 1.59% Nov 22, 2015 32,960 -2.65%
Nov 13, 2016 42,325 -1.22% Nov 15, 2015 33,857 -0.84%
Nov 06, 2016 42,849 2.41% Nov 08, 2015 34,145 -0.82%
Oct 30, 2016 41,842 4.94% Nov 01, 2015 34,427 0.48%
Oct 23, 2016 39,873 -3.44% Oct 25, 2015 34,262 0.93%
Oct 16, 2016 41,291 -0.42% Oct 18, 2015 33,945 -0.03%
Oct 09, 2016 41,464 0.64% Oct 11, 2015 33,955 0.33%
Oct 02, 2016 41,200 1.62% Oct 04, 2015 33,843 2.65%
Sep 25, 2016 40,542 1.91% Sep 27, 2015 32,970 0.64%
Sep 18, 2016 39,782 -1.44% Sep 13, 2015 32,761 -2.71%
Sep 11, 2016 40,364 0.06% Sep 06, 2015 33,673 -0.64%
Sep 04, 2016 40,340 2.22% Aug 30, 2015 33,891 -1.62%
Aug 28, 2016 39,465 -1.16% Aug 23, 2015 34,447 -0.21%
Aug 21, 2016 39,927 1.08% Aug 16, 2015 34,520 -3.94%
Aug 14, 2016 39,499 -1.02% Aug 09, 2015 35,937 -0.79%
Aug 07, 2016 39,908 1.31% Aug 02, 2015 36,223 1.35%
Jul 31, 2016 39,390 -0.29% Jul 26, 2015 35,742 -0.21%
Jul 24, 2016 39,505 0.90% Jul 19, 2015 35,815 -0.20%
Jul 17, 2016 39,152 -0.09% Jul 12, 2015 35,888 2.21%
Jul 10, 2016 39,188 3.22% Jul 05, 2015 35,112 -0.97%
Jul 03, 2016 37,967 0.48% Jun 28, 2015 35,456 4.64%
Jun 26, 2016 37,784 1.05% Jun 21, 2015 33,885 -1.86%
Jun 19, 2016 37,390 -3.58% Jun 14, 2015 34,527 -0.36%
Jun 12, 2016 38,777 4.97% Jun 07, 2015 34,651 1.88%
Jun 05, 2016 36,941 -0.76% May 31, 2015 34,012 2.89%

23
 May 29, 2016 37,223 1.44% May 24, 2015 33,057 1.38%
May 22, 2016 36,694 0.00% May 17, 2015 32,606 -1.31%
May 15, 2016 36,694 1.58% May 10, 2015 33,039 -1.46%
May 08, 2016 36,122 4.04% May 03, 2015 33,530 -0.59%
Apr 24, 2016 34,719 2.90% Apr 26, 2015 33,730 -0.13%
Apr 17, 2016 33,740 -0.08% Apr 19, 2015 33,775 4.40%
Apr 10, 2016 33,767 -0.59% Apr 05, 2015 32,351 2.98%
Apr 03, 2016 33,968 1.55% Mar 29, 2015 31,414 4.86%
Mar 27, 2016 33,450 1.12% Mar 22, 2015 29,958 -5.79%
Mar 13, 2016 33,080 1.26% Mar 15, 2015 31,800 -3.43%
Mar 06, 2016 32,669 0.70% Mar 08, 2015 32,929 -1.01%
Feb 28, 2016 32,442 3.67% Mar 01, 2015 33,264 -1.10%
Feb 21, 2016 31,294 0.91% Feb 22, 2015 33,632 -1.06%
Feb 14, 2016 31,012 -4.52% Feb 15, 2015 33,993 0.15%
Jan 31, 2016 32,479 3.77% Feb 08, 2015 33,943 -2.06%
Jan 24, 2016 31,299 0.96% Feb 01, 2015 34,657 0.62%
Jan 10, 2016 31,001 -4.71% Jan 25, 2015 34,444 1.23%
Jan 03, 2016 32,535 -2.09% Jan 18, 2015 34,027 0.71%
Jan 11, 2015 33,786 1.39%
Jan 04, 2015 33,325
Rm 14.14%

2.2

Rfr 11.51% Which is the 5 Year PIB rates as at Dec 2019

Sensitivity of PAKT’s stock returns to returns on KSE100 Index.
Β 0.192
Source: khistocks.com
Rm 14.14% Average of 5 years returns on KSE100 Index (Appendix 2.1)
Requity 9.33%

Appendix 3

Sustainable Growth
SGR = ROE*(1-DPR)
2019 2018 2017 2016 2015
ROE 70.47% 58.19% 56.61% 79.85% 67.98%
DPR 96.20% 91.28% 54.10% 78.70% 65.57%
SGR 2.6761% 5.0729% 25.9840% 17.0062% 23.4073%
Avg
SGR 14.8%

Appendix 4

2020 2021
Projected FCFE 14,778,339 16,969,862
PV2019 13,517,327 14,197,397
FCFE2022 15,212,510
Terminal Value2021 698,188,877
PV2019 of Terminal Value2021 584,121,700
Total Value 611,836,424
Total Value in thousands 611,836,424,246
Intrinsic Value per share 2394.721294

24
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