Enphase Energy Inc. Valuation Case Solution
Question 1
Yes, the cash flows should be segregated based on cash flows from the existing leases as well as the cash flows from future leases because it is expected that the inflation might increase, generating a negative rate of return due to an increase in the balance sheet of the Federal Reserve. To identify whether the new leases are beneficial or not, it is better to determine the cash flows for each case separately. Similarly, a separate discount rate would be used in each case to get the relevant enterprise value.
First of all, for the existing leases;the discount rate is calculated based on the historical data, specifically in the fiscal year 2012. The weight of debt and equity is calculated by dividing the total debt and equity by the company’s total assets in 2012. The rate on debt is calculated by dividing the interest expense with the non-current debt obligations. The Capital Asset Pricing Model is used to calculate the rate of return on equity, whereby the beta is assumed as the industry average beta. The resulted discount rate in the case of existing leases is determined as 6.27%.
Existing Leases | |
Weight of Debt | 47.65% |
Weight of Equity | 52.35% |
Rate on Debt | 4.44% |
Tax Rate | 30% |
After Tax Rate on Debt | 3.11% |
Risk Free Rate (10 Year T-bonds) | 3.03% |
Risk Premium | 5.00% |
Beta (assumed as industry average) | 1.23 |
Rate of Equity | 9.16% |
WACC | 6.27% |
However, in the case of new future leases; the targeted indebtedness of the company, i.e. 30% (given in case) is chosen and the equity is assumed to be 70%. In this case, a levered beta is calculated based on new debt and equity levels. The resulted discount rate, which can be used in discounting the cash flows related to the new operating leases, which is 8.49%.
Incorporating New Leases | |
Weight of Debt | 30.00% |
Weight of Equity | 70.00% |
Rate on Debt | 3.76% |
Tax Rate | 30% |
After Tax Rate on Debt | 2.63% |
Risk Free Rate (10 Year T-bonds) | 3.03% |
Risk Premium | 5.00% |
Beta (assumed as industry average) | 1.59 |
Rate of Equity | 10.99% |
WACC | 8.49% |
Question 2
The revenues of existing leases are calculated by assuming the growth rate in revenue from 2011-2012. In addition, the revenue of future leases is calculated by adding the minimum rental revenues in the forecasted revenues To calculate the cash flows; it is necessary to arrive at the operating income or earnings before interest and taxes of the company. All the expenses and other related line items are calculated as a percentage of sales. Then the NOPAT is calculated from EBIT at an assumed tax rate of 30%. The working capital items are also calculated as sales percentage based on the percentage of sales in 2012. Lastly, the capital expenditures given in Table 9 are subtracted to arrive at the free cash flows in both the existing and new future leases’ case (See Tables in Question 3)………………………..
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