Valuing a Division of a Company (DCF)
Hello,
I have a question regarding a (uni) project I'm currently working on.
My task is to carry out a DCF valuation of ThyssenKrupp's elevator division.
Have created several DCF analyses in the past, but I'm kind of stuck at the moment. Reason is that most of the figures reported in their ARs are consolidated figures. How can I, for example, calculate historical and forecasted FCFs if I do not know some of the items that I need to calculate it?
They do report sales, EBIT, CapEx and D&A on division-level, among other things, but obviously not working capital (current assets and liabilities), leases, etc.
What kind of assumptions would be sensible to make in this case so that I can calculate the FCF?
Many thanks in advance for the help.
Anyone?
You have all the elements for a DCF. Take leases as part of your WACC calc --> you can base this on peers.
The professor calculates FCF like this: EBIT * (1 - T) - Reinvestments And reinvestments consists of CapEx, Change in PV of Operating Leases, Change in Non-Cash Working Capital, minus D&A. How would you be able to derive the FCF if you only have the consolidated numbers for Non-Cash Working Capital and Operating Leases? Or am I missing something...
Do they not capitalise operating leases? Mandatory under IFRS I believe. In that case it's in debt and you can ignore it as equity price will move with debt quantum buyer assumes from seller.
This is a fair point. I believe they adopt this rule as of FY2019-2020, so I could indeed do that. Any idea what to do with working capital? You said I have all items I need for FCF, but I'm not quite sure how to calculate it without that part. I was thinking, maybe calculate the change in working capital for the entire company for the forecast horizon, and then take a certain % of this... but seems very shortsighted to me.
Thanks a lot for your time
Would look at peers and take % of sales or DSO/DIO/DPO. In the W/C often isn't the biggest cash consumer as sales will not suddenly sky-rocket I imagine.
^This. You (presumably) have comps for the business anyway, so do a quick spreadsheet showing those companies' working capital ratios, take the average, and apply it to the business you're valuing. Bankers routinely do this for client presentations, at least until they have better information, so if it's good enough to clear that pretty high bar, it should be more than sufficient for academic work,
It's unlikely that your business has substantially different WC ratios vs. the comps, so you're likely to end up with a pretty accurate FCF number.
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