Economia aziendale I

DCF-Valuation Method

DCF-Approaches

1. Entity Approaches:

a. WACC Approach

b. APV Approach

c. TCF Approach

2. Equity Approach

WACC Approach

The WACC approach is the most widely used DCF method

worldwide.

Core idea:

To determine a cash flow that is financially neutral and reflects

the company’s true cash-generating ability.

To implement this concept, the company is divided into two

spheres:

Operating sphere

 Financing sphere



Operating Sphere

The operating sphere is represented by the operating Free

Cash Flow (oFCF).

Operating refers to the company’s core business activities.

 Free means that the cash flow is available for distribution

 to capital providers.

The oFCF is financing-neutral, meaning it is not affected by

the company’s financing decisions. It excludes all financial cash

flows.

Key Assumptions for Modeling oFCF

To properly model oFCF, several strict assumptions must be

made:

1. Financial income

Financial income is excluded from oFCF. However, it is still

value-relevant.

Therefore, it must be considered separately:

Cash and cash equivalents generating financial

o income are classified as non-operating assets.

The present value of this financial income is equal to

o the value of cash and cash equivalents at the

valuation date.

This value is added to the operating enterprise

o value.

2. Investments accounted for using the equity method

The same logic applies:

Income from associates is excluded from oFCF.

o The corresponding balance sheet item (equity

o investments) is valued separately and added to total

firm value.

3. Financial expenses

Financial liabilities are considered by subtracting interest-

bearing debt from enterprise value.

Tax Effects

Additional considerations relate to taxation:

Financial income increases the taxable base and

 therefore leads to higher taxes.

This effect is ignored in the WACC approach.

Financial expenses (interest) are highly value-relevant:

 The tax benefit of debt (tax shield) is not included

o in oFCF.

Instead, it is reflected in the cost of capital

o (WACC).

e d

( )

+

WACC=r ∙ r ∙ 1−t ∙

e d

+d +d

e e

cost of debt before taxes

=¿

r d = cost of debt after taxes

( )

r ∙ 1−t

d = tax shield

1−t

CAPEX

Example:

PPE 31.12.t(0): 0

+ Investment in PPE 01.01.t(1) 10

- Depreciation in t(1) 1

PPE 31.12.t(1): 9

PPE 31.12.t(1) = PPE 31.12.t(0) + Investment in PPE t(1) –

Depreciation t(1)

Investment in PPE t(1) = PPE 31.12.t(1) - PPE 31.12.t(0) +

Depreci