Got asked by my friend on an interview question about how to value 20% equity stake in a single asset power company with a remaining concession of 15 years.
My thinking is as follows:
1. Project the financials of the company for 15 years till the end of concession
2. Calculate the FCFE (primarily dividends + capital redemption at the end of the concession) for the projection period
3. Calculate the cost of equity using and relever the cost of equity by the capital structure of the company across the projection period on a rolling basis.
4. Discount FCFE by rolling cost of equity to derive the
5. FInally, multiply the equity value by 20%.
Any thoughts on the above approach? Any other better methods?