How to value a concession based power company?

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 CAPM 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 equity value
5. FInally, multiply the equity value by 20%.

Any thoughts on the above approach? Any other better methods?

Comments (4)

Aug 2, 2017


Aug 2, 2017

Seems sensible

Aug 3, 2017

In banking and pre any investment role, valuation is very cookie cutter. Your response is right on as far as the typical theoretical valuation goes. If I was asked this question, the only changes I would make is that I would throw out the cost of equity calculation and discount the FCFE by my (or my funds) hurdle rate. If I asked that question in an interview, and the interviewee gave me that response, I would say it is absolutely correct but caveat it with the fact that we like to discount things back at our hurdle rate.

TLDR: strong answer

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Aug 3, 2017