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Formula sheet/NISM Series XV: Research Analyst/Valuation Principles
[ VALUATION PRINCIPLES ]

Two-Stage DCF Valuation & Terminal Value (TV)

Terminal Valuen=FCFFn+1/(WACC−g)=[FCFFn×(1+g)]/(WACC−g)\text{Terminal Value}_{n} = FCFF_{n+1} / (WACC - g) = [ FCFF_{n} \times (1 + g) ] / (WACC - g)
Enterprise Value=∑[FCFFt/(1+WACC)t]+[Terminal Valuen/(1+WACC)n](for t=1to n)\text{Enterprise Value} = \sum [ FCFF_{t} / (1 + WACC)^{t} ] + [ \text{Terminal Value}_{n} / (1 + WACC)^{n} ] (\text{for t}=1 \text{to n})
Equity Value=Enterprise Value+Cash&Liquid Assets−Debt−Preferred Capital−Minority Interest\text{Equity Value} = \text{Enterprise Value} + Cash \& \text{Liquid Assets} - Debt - \text{Preferred Capital} - \text{Minority Interest}
Variables

Perpetual growth rate 'g' should never exceed the long-term sustainable nominal GDP growth rate. FCFFnFF_{n}, FCFFn+1FF_{n+1}: Free cash flow to firm in the terminal year and the year after; n: Number of explicit forecast years.

Worked examples
Gordon Growth Dividend Discount Model (DDM)

Nestle India paid a dividend of Rs 120 per share last year (D_0). The dividend is expected to grow perpetually at a constant rate of 8% p.a. If the required rate of return on equity (k_e) is 12%, calculate the intrinsic value per share.

CAPM Cost of Equity and WACC Calculation

An analyst is estimating WACC for Titan Company. Data: 10-year G-Sec yield (R_f) = 7.0%, Expected Nifty 50 Return (R_m) = 14.0%, Titan Beta (β) = 1.25. Pre-tax Cost of Debt (k_d) = 8.5%, Corporate Tax Rate = 25%. Capital Structure: Equity = 80%, Debt = 20%. Calculate Cost of Equity (k_e) and WACC.

Free Cash Flow to Firm (FCFF) and Equity (FCFE)

Infosys reports EBIT of Rs 28,000 Cr, Tax Rate 25%, Depreciation Rs 4,000 Cr, Capex Rs 3,200 Cr, and Non-Cash Working Capital Increase Rs 800 Cr. Finance Cost is Rs 200 Cr, and Net Debt issued during the year is Rs 500 Cr. Calculate FCFF and FCFE.

Two-Stage DCF Valuation with Terminal Value & Equity Value

CleanEnergy Ltd projects FCFF of Rs 500 Cr (Year 1), Rs 650 Cr (Year 2), and Rs 800 Cr (Year 3). Beyond Year 3, FCFF will grow perpetually at 5% p.a. WACC is 12%. The company has Debt of Rs 2,000 Cr and Cash of Rs 500 Cr. Total shares = 10 Crore. Calculate Enterprise Value, Equity Value, and Target Price per share.