Discounted Cash flow:

Discounted cash flow analysis is one of the most widely used fundamental analysis

technique. The approach values the firm by calculating the present value of free cash flow to

the firm and then adjusting for the market value of net debt. The advantage of using

discounted cash flow valuation technique is that it provides a lot of flexibility to the analyst in

terms of estimating the different inputs. In the following sections, the focus is on estimating

the different line items on the financial statement. The base financial data is taken from 10-K

documents published ("Ford Motor Company - Investors - Financials & Filings")

a) Income statement:

The key set of drivers to the discounted cash flow analysis is the share of revenue

available to the firm after it pays the different stakeholders.

i) Revenue: The top line of the firm indicates the revenue generated by the firm over

the coming year. Since, the operations of the firm are impacted by multiple factors

beyond the control/ knowledge of the management, the revenue is based on the

estimates from other analysts who have been tracking the market. In this case, the

revenue for 2021 and 2022 is available from analyst predictions. Post this, the

revenue is estimated to return back to long term performance average. For the

purpose of a comparison, the data for 2020 has not been included in the analysis

because Ford had a major impact on its financials owing to COVID lockdown.

ii) Cost of goods sold and other operating costs: As Ford has managed its supply

chain over the years, we can safely assume that the cost structure of the firm is

fairly stable and is not expected to change in the coming year too. For the purpose

of the same, costs like cost of goods sold, sales and admin, other income are

assumed to be in the same proportion of sales as the average of last few years.
 iii) Non-operating line items: Non-recurring income and expenses are volatile, so in

the model, these line items are treated differently. For instance, net investment

income and irregular income/expenses is assumed to be zero while interest

expense is assumed to be stable over the coming years. The reason for this

assumption is that it is assumed that the firm would not pay back or take any more

debt in the coming years for expansion or operational purposes.

iv) Taxes: Taxes are assumed to be 21% of the earnings before taxes in line with the

corporate tax rate in the United States.

v) Non-controlling share of earnings is assumed to stay in line with 2020 as the firm

does not anticipate any change in its capital mix.

(in million) 2021 2022 2023 2024 2025

Total Revenue 143,770 153,110 154,476 155,855 157,245

Cost of Revenue 122,844 130,825 131,992 133,170 134,358
Gross Profit 20,926 22,285 22,484 22,685 22,887
Operating Income/Expenses 19,580 20,852 21,038 21,226 21,415
SG&A 10,833 11,537 11,640 11,744 11,848
Other income/expense 8,747 9,315 9,398 9,482 9,567
Provision Expense/Write-Back 0 0 0 0 0
Total Operating Profit/Loss 1,346 1,433 1,446 1,459 1,472
Non-Operating Income/Expenses 329 428 443 457 472
Total interest income/Expense -1,199 -1,199 -1,199 -1,199 -1,199
Net Investment Income 1,528 1,627 1,642 1,656 1,671
Irregular Income/Expenses 0 0 0 0 0
Other Income/Expense 0 0 0 0 0
Pretax Income 1,675 1,861 1,889 1,916 1,944
Provision for Income Tax 352 391 397 402 408
Net Income 1,323 1,471 1,492 1,514 1,536
Discontinued operations 1,323 1,471 1,492 1,514 1,536
Non-Controlling -3 -3 -3 -3 -3
Net Income after Non-Controlling 1,320 1,468 1,489 1,511 1,533

b) Balance sheet:

The balance sheet of the firm is an indicator of the current position of the firm’s

financial performance. The forecasting of balance sheet requires assumptions on

different line items (as discussed here below).

a) Cash and cash equivalents on the firm’s balance sheet are derived from the cash

flow statement and hence the assumptions are kept beyond the scope of this

chapter and will be discussed in the next session.

b) Short term and long-term investments: Firms invest their surplus cash in terms of

short term and long-term investments for a steady flow of additional income.

Considering that the US economy is still under the impact of the lockdown and

would take a couple of years to revert to pre-slowdown growth levels and hence

the investments are assumed to stay flat in the coming years.

c) Inventories indicate the amount of finished and work in progress raw material

available with the firm. For Ford, it has been seen that average days of inventory

have been between ~21 since 2017. Although 2020 is an exceptional year, it has

been assumed that the average number of days inventory between 2017 and 2019

is taken for future years too. This means that the inventory is related to the cost of

goods sold over the coming year.

d) Trade receivables also have been more or less flat in the past compared to 2020

(again driven by unfavourable market) and hence the average days trade

receivable is assumed to remain even in near future and hence the amount of trade

receivables is kept in line with this average.

e) Other current assets are also assumed to remain in line with their 2020 values

f) Gross PPE and accumulated depreciation have also been calculated using the

average of last few years. Capex (captured in cash flow statement) as a percentage

of sales is used to proxy future capital expenses. These expenses would be used to

calculate the gross PPE for future years. Accumulated depreciation is estimated by

forecasting future depreciation expenses (which is taken as a % of gross PPE)

g) Net intangible assets are assumed to be zero and in line with previous year trends.
 h) Other long-term assets are assumed to remain flat in the coming future

i) On the liability side, most of the line items are assumed to be same as the firm’s

capital position is not expected to change. The firm is not expected to change its

capital financing position in the near future.

j) Account payables of the firm are expected to remain stable and account for the

last three-year average days account payables. This again indicates that the firm

will not be changing its suppliers in the short term and since the entire market is

under stress, it seems unlikely that credit policies for a major firm like Ford would

change.

(in million) 2021 2022 2023 2024 2025

269,52
Total Assets 263,518 266,178 267,841 8 271,239
138,46
Total Current Assets 116,736 123,689 130,589 7 147,329
Cash & Short Term
Investments 22,096 23,132 29,168 36,172 44,153
Cash and Cash Equivalents (2,622) (1,586) 4,450 11,454 19,435
Short Term Investments 24,718 24,718 24,718 24,718 24,718
Inventories 7,150 7,614 7,682 7,750 7,820
Trade and Other Receivables,
Current 83,910 89,361 90,159 90,963 91,775
Assets Held for Sale 47 47 47 47 47
Other Current Assets 3,534 3,534 3,534 3,534 3,534
131,06
Total Non-Current Assets 146,782 142,489 137,252 2 123,910
Net Property, Plant and
Equipment 33,348 29,055 23,818 17,628 10,476
Gross Property, Plant and
Equipment 76,759 84,030 91,366 98,768 106,235
-
Accumulated Depreciation -43,411 -54,975 -67,548 81,140 -95,759
Total Long Term Investments 32,852 32,852 32,852 32,852 32,852
Long Term Equity
Investments 4,901 4,901 4,901 4,901 4,901
Other Investments, Non-
Current 27,951 27,951 27,951 27,951 27,951
Trade and Other Receivables 55,277 55,277 55,277 55,277 55,277
Deferred Tax Assets, Non-
Current 12,423 12,423 12,423 12,423 12,423
Other Non-Current Assets 12,882 12,882 12,882 12,882 12,882
Net Intangible Assets 0 0 0 0 0
 232,93
Total Liabilities 231,387 232,579 232,754 0 233,107
Total Current Liabilities 92,129 93,321 93,496 93,672 93,849
Payables and Accrued
Expenses, Current 18,356 19,548 19,723 19,899 20,076
Financial Liabilities, Current 51,666 51,666 51,666 51,666 51,666
Provisions, Current 2,284 2,284 2,284 2,284 2,284
Deferred Liabilities, Current 2,161 2,161 2,161 2,161 2,161
Liabilities Held for Sale 0 0 0 0 0
Other Current Liabilities 17,662 17,662 17,662 17,662 17,662
139,25
Total Non-Current Liabilities 139,258 139,258 139,258 8 139,258
Financial Liabilities, Non- 111,33
Current 111,332 111,332 111,332 2 111,332
Provisions, Non-Current 18,048 18,048 18,048 18,048 18,048
Tax Liabilities, Non-Current 538 538 538 538 538
Deferred Liabilities, Non-
Current 4,559 4,559 4,559 4,559 4,559
Other Non-Current Liabilities 4,781 4,781 4,781 4,781 4,781
Preferred Securities Outside
Stock Equity
Total Equity 32,131 33,599 35,088 36,599 38,132
Equity Attributable to Parent
Stockholders 32,010 33,478 34,967 36,478 38,011
Paid in Capital 20,741 20,741 20,741 20,741 20,741
Retained
Earnings/Accumulated Deficit 19,563 21,031 22,520 24,031 25,564
ACI -8,294 -8,294 -8,294 -8,294 -8,294
Non-Controlling/Minority
Interests 121 121 121 121 121

c) Cash Flow Statement

i) Cash flow from financing: Since, the firm is not expected to change its capital

position, the cash flow from financing is expected to be zero in the coming

years i.e. the firm will not issue or pay back any investors

ii) Cash flow from investment: The firm is not expected to invest in any

investment opportunity except for capital expenditure on plant, property and

equipment (calculated using capex as a % of sales)

iii) Cash flow from operations: Most of the inputs to cash flow statement are

taken from the income statements and balance sheet.

 ($ milion) 2021 2022 2023 2024 2025
Cash Flows From Operating
Activities
Net income 1,323 1,471 1,492 1,514 1,536
Depreciation & amortization 10,563 11,564 12,573 13,592 14,619
Investment/asset impairment charges 0 0 0 0 0
Deferred income taxes 0 0 0 0 0
Stock based compensation 0 0 0 0 0
Change in working capital (32,921) (4,723) (691) (697) (703)
Accounts receivable (31,516) (5,451) (797) (805) (812)
Inventory 3,658 (464) (68) (69) (69)
Other working capital (5,063) 1,192 174 176 178
Other non-cash items (3) (3) (3) (3) (3)
Net cash provided by operating
activities (21,038) 8,308 13,372 14,406 15,449
Cash Flows From Investing
Activities
Investments in property, plant, and (7,468
equipment (6,828) (7,271) (7,336) (7,402) )
Acquisitions, net 0 0 0 0 0
Purchases of investments 0 0 0 0 0
Sales/Maturities of investments 0 0 0 0 0
Other investing activities 0 0 0 0 0
(7,468
Net cash used for investing activities (6,828) (7,271) (7,336) (7,402) )
Cash Flows From Financing
Activities
Debt issued 0 0 0 0 0
Debt repayment 0 0 0 0 0
Common stock repurchased 0 0 0 0 0
Dividend paid 0 0 0 0 0
Other financing activities 0 0 0 0 0
Net cash provided by (used for)
financing activities 0 0 0 0 0
Effect of exchange rate changes 0 0 0 0 0
Net change in cash (27,865) 1,037 6,035 7,004 7,981
Cash at beginning of period 25,243 (2,622) (1,586) 4,450 11,454
Cash at end of period (2,622) (1,586) 4,450 11,454 19,435

Once the financial statements are forecasted for the coming future, the next step is to

understand the amount of free cash flows available with the firm after paying for operating

and capital expenses. Since, free cash flows are calculated from the firm’s perspective, it will

account for both debt and equity holders.

Free cash flow ¿ firm=Operating cash flow −Capex .

a) Terminal cash flows: Although the entire valuation model assumed a 5-year time

horizon, the business is a going concern which means that the business will continue

into eternity. It is assumed that post the initial 5-year window, the firm would grow

into a perpetual growth model (at 2%) which is the long-term growth of the economy

("United States GDP Annual Growth Rate | 1948-2020 Data | 2021-2023 Forecast").

FCFF ( 2025 )∗(1+long term growth )

PV of terminal cash flow=
WACC −longterm growth rate

b) WACC or the discounting rate is the opportunity cost for the firm to raise any further

capital for these opportunities. Since, the firm can raise capital from equity or debt,

the weighted average cost of capital is the blended rate derived from cost of equity

and cost of debt.

WACC =P . t cost of debt∗Debt ¿ capital ratio+Cost of equity∗(1−debt¿ capital ratio)

i) Cost of equity: Cost of equity is based on the capital asset pricing model

which adds a premium for the undiversified risk on the rate of return required

for equity investors which is calculated using beta (which indicates sensitivity

of the firm). The beta of the stock is taken to be 1.21 ("Beta: Ford Motor

Company"), Risk free rate at 1.68% ("Treasury Yields: US Treasury") and

market risk premium of 13.6% ("The Average Stock Market Return Over The

Past 10 Years")

Cost of equity=Risk free rate+ Beta∗( Expected market r eturn−Risk free rate)

ii) Post-tax cost of debt: Cost of debt is equal to the rate at which the firm is

raising debt from its debt holder. Since the interest paid by the firm is tax

exempted, the cost of debt is adjusted for the tax rate.

Post tax cost of debt=Cost of debt∗(1−tax rate)

 iii) Target mix: Since the capital structure of the firm is not expected to change,

the target mix is taken as the current mix of debt and equity in the firm’s

current capital structure:

Book value of debt

Debt ¿ capital ratio=
( Book value of debt+ Market cap .)

Based on the inputs provided above, the share price of the firm can be calculated by adjusting

the enterprise value of the firm with debt.

Equity value=Enterprise value−Book value of net debt

$ mn 2021 2022 2023 2024 2025

OCF ($21,038) $8,308 $13,372 $14,406 $15,449
($7,271 ($7,336 ($7,402 ($7,468
Less: Capex ($6,828) ) ) ) )
FCFF ($27,865) $1,037 $6,035 $7,004 $7,981

Terminal Value $250,720.66

PV of terminal Value $194,151.07
PV of FCFF $8,474.15
Enterprise value $202,625.21
($111,332.00
Less: Debt )
Equity Value ($ mn) $91,293.21
No. of shares (mn) 4,025.00
Implied Equity Value per
share $22.68

The implied equity value per share is then calculated by dividing the equity value calculated

above with the number of shares outstanding which shows that the share price comes out to

be $22.7 (which is almost twice the current share price of $12.30)

Equity value
Implied equity value per share=
Number of shares
References

"Beta: Ford Motor Company". Finance.Yahoo.Com, 2021,

https://finance.yahoo.com/quote/F/. Accessed 28 Mar 2021.

"Ford Motor Company - Investors - Financials & Filings". Shareholder.Ford.Com, 2021,

https://shareholder.ford.com/investors/financials-and-filings/default.aspx. Accessed

20 Mar 2021.

"The Average Stock Market Return Over The Past 10 Years". Business Insider, 2021,

https://www.businessinsider.com/personal-finance/average-stock-market-return?

IR=T. Accessed 27 Mar 2021.

"Treasury Yields: US Treasury". Bloomberg.Com, 2021,

https://www.bloomberg.com/markets/rates-bonds/government-bonds/us. Accessed 26

Mar 2021.

"United States GDP Annual Growth Rate | 1948-2020 Data | 2021-2023

Forecast". Tradingeconomics.Com, 2021, https://tradingeconomics.com/united-

states/gdp-growth-annual#:~:text=In%20the%20long%2Dterm%2C%20the,according

%20to%20our%20econometric%20models.