Sriram Wheels Case Solution
Q:1 Part a
Advantages of Using DCF Method:
Discounted cash flow analysis finds the present value to the company or any asset. This valuation method has few advantages. DCF method using very detailed information to calculate the value of a company or any asset. The advantages of this method are listed below:
- The information used in this method is very detailed
- It considers all the assumptions of the business while calculating the value of the firm
- DCF calculate the values independently, it does not require any other company data for comparison
- Easily can be done on Excel
- More importantly, it is best to use for the mergers and acquisition
- IRR can be calculated easily and it allows us to do a sensitivity analysis
Q: 1 part b
While using this method is used for financial analysis. No matter if it gives a complete picture of the valuation and company analysis. Along with the pros of using this method, there are also cons of the DCF method, The main problem which was noted in this method was that there are chances of errors in the calculations and along with that while doing analysis it is hard to estimate the value and importance of firm. This method is very lengthy and requires more concentration. It only considers the cost of the firm, not the competitor’s value. Degree of uncertainty increase in this analysis. Despite the problems, I would suggest using the multiple-based target price approach because it requires-fewer assumptions that means that low uncertainty.
No doubt there is a difference between the free cash flow of equity and the free cash flow of a firm. The free cash flow of a firm (FCFF) is the cash flow available for discretionary distribution to all the investors of a company it includes both debt and equity once the cash expenses and capital expenditure has been paid. Whereas the cash flow of equity (FCFE) is the discretionary cash available only in the equity holder company. Both have different calculation methods free cash flow and unpaid cash flows both are discussed below:
|Uncounted Cash Flow
EBIT * (1-Rate) + Non- financial Costs – Changes in workingAssets and Liabilities – CapEx
Cash Flows from spending+ changedInterest Rate Tax – CAPEX
ModifiedInterest Costs + Interest charges + Non-Cash payment – Changes in Operating and dues Assets – CAPEX
|Free Money Flow
Net + Non-Cash Revenue – exchange in Operating and dues Assets – CAPEX + Net dues Issued (Replaced)
Cash Flow from workings – CAPEX + CRR (Refunded)
The price depletion depends on the type of cash flow we are using and the reduction rate of FCF is also defined based onIf FCF is being deducted. When we calculate using WACC It is used as deducted rate and it gives complete firm analysis.
To find the discounted factor or WACC we started with gathering and calculating the data first we calculated the leveraged beta and then the cost of equity and cost of debt i.e. leveraged beta was 1.19, cost of equity was 21%, cost of debt was 7%. the WACC was calculated through a formula of multiplying the cost of debt with a ratio of debt and vice versa and added those it was 14.02.detailed calculation can be seen in Exhibit…………………….
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