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DCF Simple Exercises1

1. The document presents examples of various discounted cash flow (DCF) models including simple present value, perpetuity, net present value, internal rate of return, and valuation of a hot dog stand. 2. Key inputs and calculations are shown for determining the weighted average cost of capital (WACC) of Home Depot using the capital asset pricing model (CAPM). 3. The treasury stock method is demonstrated to calculate the dilutive impact of employee stock options on shares outstanding.

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Lauren James
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© © All Rights Reserved
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Download as XLSX, PDF, TXT or read online on Scribd
25 views

DCF Simple Exercises1

1. The document presents examples of various discounted cash flow (DCF) models including simple present value, perpetuity, net present value, internal rate of return, and valuation of a hot dog stand. 2. Key inputs and calculations are shown for determining the weighted average cost of capital (WACC) of Home Depot using the capital asset pricing model (CAPM). 3. The treasury stock method is demonstrated to calculate the dilutive impact of employee stock options on shares outstanding.

Uploaded by

Lauren James
Copyright
© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Present Value & DCF Exercises

x Simple present value


Period (t) 1 2 3
Cash flows 1,000 1,245 1,258
Discount rate (r) 25% 25% 25%
Discounted cash flow

Present value

x Perpetuity example
Cash flows at period t 1,000
Perpetuity growth rate 5%
Discount rate (r) 25%
Cash flows at period t+1
Present value of perpetuity cash flows at period t

x Net present value / Internal rate of return


Period (t) 0 1 2 3
Cash flows (5,000) 1,000 1,245 1,258
Discount rate (r) 25% 25% 25% 25%
Discounted cash flow

Net present value


Internal rate of return

Proof:
Period (t) 0 1 2 3
Cash flows (5,000) 1,000 1,245 1,258
Discount rate (r) 0.0% 0.0% 0.0% 0.0%
Discounted cash flow

Net present value

x Hot Dog Stand: DCF


Discount rate 10%
Perpetual growth rate 5%

Year 2021 2022 2023 2024


Period 1 2 3 4
Cash flow 10,500 13,000 15,000 17,500
Present value (PV) of cash flow

PV of forecast period
2026 cash flow
Perpetuity value in 2025
PV of perpetuity value

DCF value (PV of all cash flows)

x Hot dog stand: Comps


EBITDA Sale Price Multiple
Comp 1 NM
Comp 2 NM
Comp 3 NM
Peer group mean NM

Our hot dog stand


Comps-derived multiple NM
Implied value NM

x Home Depot WACC


Shares outstanding 1,500
Share price $50.00
Market Capitalization
Debt $7,600
Total Capital
Cost of debt 6.0%
Marginal tax rate 35.0%
After Tax Cost of Debt
Risk free rate 2.0%
Beta 0.8
Market risk premium 6.0%
Cost of Equity

Debt weight
Equity weight
WACC

x Treasury Stock Price


$ and shares in millions, except per share data
Current share price $240.00

Stock options - Treasury stock method


Outstanding Exercise In-the-$
options price options
Tranche 1 10.0 $67.45 10.0
Tranche 2 50.0 $112.63 50.0
Tranche 3 10.0 $146.29 10.0
Tranche 4 42.0 $218.91 42.0
Tranche 5 20.0 $265.13 --
Tranche 6 28.0 $302.61 --
Tranche 7 45.0 $309.74 --
Total 205.000 112.0

Total proceeds ($mm) $16,963


Total shares repurchased (mm) 70.7
x Net dilutive impact of stock options 41.3
4 5
1,568 1,895
25% 25%
Cash flow/(1+discount rate)period

Sum of Yrs 1-5 PV of cash flows

4 5
1,568 1,895
25% 25%
Cash flow/(1+discount rate)period

Sum of Yrs 0-5 PV of cash flows


IRR formula on all cash flows

4 5
1,568 1,895
0.0% 0.0% IRR from above
Cash flow/(1+discount rate)period

Sum of Yrs 0-5 PV of cash flows

Enter discount rate in cell C3


Enter prepetual growth rate in cell C4

2025
5
20,500 Enter cash flows as mentioned in the slide deck
Cash flow/(1+discount rate)period

Sum of 2021-2025 PV of cash flows


2025 cash flow * (1+perpetual growth rate)
2026 cash flow / (discount rate - perpetual growth rate)
Perpetuity value / (1+discount rate)^t

PV of forecast period + PV of terminal period

Sum of 2021-2025 PV of cash flows

Input
Input
= Shares Outstanding * Share Price
Input
= Market Cap + Debt
Input
Input
= Cost of debt * (1 - Marginal tax rate)
Input
Input
Input
= CAPM

= Debt / Total Capital


= Market Capitalization / Total Capital
= (After tax Cost of Debt * Debt Weight) + (Cost of Equity * Equity Weight)

If x-price < current share price, options are ITM


If x-price < current share price, options are ITM
If x-price < current share price, options are ITM
If x-price < current share price, options are ITM
If x-price < current share price, options are ITM
If x-price < current share price, options are ITM
If x-price < current share price, options are ITM
Sum

Sumproduct
Total proceeds / current share price
Total ITM options less shares repurchased
Present Value & DCF Exercises
x Simple present value
Period (t) 1 2 3
Cash flows 1,000 1,245 1,258
Discount rate (r) 25% 25% 25%
Discounted cash flow 800 797 644

Present value 3,504

x Perpetuity example
Cash flows at period t 1,000
Perpetuity growth rate 5%
Discount rate (r) 25%
Cash flows at period t+1 1,050
Present value of perpetuity cash flows at period t 5,250

x Net present value / Internal rate of return


Period (t) 0 1 2 3
Cash flows (5,000) 1,000 1,245 1,258
Discount rate (r) 25% 25% 25% 25%
Discounted cash flow (5,000) 800 797 644

Net present value (1,496)


Internal rate of return 10.9%

Proof:
Period (t) 0 1 2 3
Cash flows (5,000) 1,000 1,245 1,258
Discount rate (r) 10.9% 10.9% 10.9% 10.9%
Discounted cash flow (5,000) 902 1,012 922

Net present value 0

x Hot Dog Stand: DCF


Discount rate 10%
Perpetual growth rate 5%

Year 2021 2022 2023 2024


Period 1 2 3 4
Cash flow 10,500 13,000 15,000 17,500
Present value (PV) of cash flow 9,545 10,744 11,270 11,953

PV of forecast period 56,241


2026 cash flow $21,525
Perpetuity value in 2025 430,500
PV of perpetuity value 267,307

DCF value (PV of all cash flows) 323,547

x Hot dog stand: Comps


EBITDA Sale Price Multiple
Comp 1 9,000 260,000 28.9x
Comp 2 18,000 380,000 21.1x
Comp 3 8,000 150,000 18.8x
Peer group mean 22.9x

Our hot dog stand 15,500


Comps-derived multiple 22.9x
Implied value 355,208

x Home Depot WACC


Shares outstanding 1,500
Share price $50.00
Market Capitalization $75,000
Debt $7,600
Total Capital $82,600
Cost of debt 6.0%
Marginal tax rate 35.0%
After Tax Cost of Debt 3.9%
Risk free rate 2.0%
Beta 0.8
Market risk premium 6.0%
Cost of Equity 6.8%

Debt weight 9.2%


Equity weight 90.8%
WACC 6.5%

x Treasury Stock Price


$ and shares in millions, except per share data
Current share price $240.00

Stock options - Treasury stock method


Outstanding Exercise In-the-$
options price options
Tranche 1 10.000 $67.45 10.000
Tranche 2 50.000 $112.63 50.000
Tranche 3 10.000 $146.29 10.000
Tranche 4 42.000 $218.91 42.000
Tranche 5 20.000 $265.13 0.000
Tranche 6 28.000 $302.61 0.000
Tranche 7 45.000 $309.74 0.000
Total 205.000 112.000

Total proceeds ($mm) $16,963


Total shares repurchased (mm) 70.680
x Net dilutive impact of stock options 41.320
4 5
1,568 1,895
25% 25%
642 621 Cash flow/(1+discount rate)period

Sum of Yrs 1-5 PV of cash flows

4 5
1,568 1,895
25% 25%
642 621 Cash flow/(1+discount rate)period

Sum of Yrs 0-5 PV of cash flows


IRR formula on all cash flows

4 5
1,568 1,895
10.9% 10.9% IRR from above
1,036 1,129 Cash flow/(1+discount rate)period

Sum of Yrs 0-5 PV of cash flows

Enter discount rate in cell C3


Enter prepetual growth rate in cell C4

2025
5
20,500 Enter cash flows as mentioned in the slide deck
12,729 Cash flow/(1+discount rate)period

Sum of 2021-2025 PV of cash flows


2025 cash flow * (1+perpetual growth rate)
2026 cash flow / (discount rate - perpetual growth rate)
Perpetuity value / (1+discount rate)^t

PV of forecast period + PV of terminal period

Sum of 2021-2025 PV of cash flows

Input
Input
= Shares Outstanding * Share Price
Input
= Market Cap + Debt
Input
Input
= Cost of debt * (1 - Marginal tax rate)
Input
Input
Input
= CAPM

= Debt / Total Capital


= Market Capitalization / Total Capital
= (After tax Cost of Debt * Debt Weight) + (Cost of Equity * Equity Weight)

If x-price < current share price, options are ITM


If x-price < current share price, options are ITM
If x-price < current share price, options are ITM
If x-price < current share price, options are ITM
If x-price < current share price, options are ITM
If x-price < current share price, options are ITM
If x-price < current share price, options are ITM
Sum

Sumproduct
Total proceeds / current share price
Total ITM options less shares repurchased

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