I am working on a problem where I have FCFs for 5 future periods and need the value at period 5 (both for owners equity - currently 15% and for warrent - 3%). I've completed a DCF to get to present Enterprise Value and equity value - do I simply calculate the FV of Equity to answer the question or is there a simpler way to get there?
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sorry, I don´t get your question actually. Could you elaborate and deliver more input?
Sure - sorry about that - I am modeling an LBO transaction (private company) and two of the end questions I have are: 1 - What is the value of the owners Equity in 2021, 2 - what is the value of the warrants in 2021?; Part of the buyout was funded with Mezz debt that had 3% warrants. Deal close is 12/31/2016. I have the present value of equity (and therefore the present value for the owner and the warrant) but am wondering how I get to 2021. Is it just using future value calculation or is there a better way to do it?
You could calc. the EV by saying 2021 = TV and then applying the TV formula. Then subtract debt (all items which you have to include here), you get your equity value.
Since I don´t know which figures are available, you could also use the WACC Iteration, since your capital structure will stay same over time (?).
Ok thanks- still need to clarify, When you say 2021=TV, do you mean that I wouldn't account for any cash flows prior to 2021?
For example:
Unlevered FCFs: 2017 : 4,083 2018: 4,990 2019: 5,792 2020: 6,846 2021: 7,479
WACC: 10.87% Growth Rate: 4%
Terminal Value: 113,176 Present Value of TV: 67,551
Would I still add this to PV of all CFs? Do I even need to take the PV of the TV?
Thanks again for your help - I haven't looked at anything finance in a long time!
I think I know what you mean now. Rather than look at the CFs, calculate the TV (FCF from 2021/(WACC - g); and then discount back one period to 2021. For the numbers I've provided, I'm getting $92,550. Is it necessary to discount back a period? Should I also add the FCF from 2021?
I think, I get your point better now. So as I suggested, you could calc. an implied EV (=TV) in 2021 by the following Formula:
TV = ((1+g)FCFU 2021)/(WACC-g) TV = ((1+4%)7479)/(10,87%-4%)
Then by the EV-Equity Bridge, you should get your Equity Value for 2021. EV - net Debt (including all interest bearing debt, etc.) = Equity Value The logic behind this concept: After 2021 the company is in steady state.
Let´s imagine we are in 2021, we see a company with a continuous growth. Since we are not doing a mechanical appendix to force steady state, we can assume EV2021 is equal to TV.
Makes sense to you?
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