LBA: DCF Analysis

Financial Plan Budget & Model

Assignment #2

November 5th, 2023

This comprehensive valuation report outlines the determination of the estimated value of Etihad Etisalat
Company (EEC). By utilizing the Discounted Cash Flow (DCF) analysis, I aim to provide a
detailed insight into EEC's intrinsic worth. Tere are many important steps in the valuation process,
and each one plays a role to determining the company's worth. The assumptions, formulas, and
calculations used are detailed below:
Historical Free Cash Flows (FCF)
To initiate the valuation process, historical data from 2018 to 2022 is analyzed and includes:
• Revenue: The total income generated by the company.
• Operating Expenses: The costs associated with day-to-day operations.
• Capital Expenditures: The expenditures made to maintain and expand the company's
assets.
• Changes in Working Capital: Variations in net working capital from year to year.
• Tax Rate: The effective tax rate paid by the company.
The formula used to calculate Free Cash Flow (FCF) for each year from 2018 to 2022 is as follows:
FCF 2018 = (Operating Income - Taxes) + Depreciation - Capital Expenditures - Changes in
Working Capital
This formula is applied for each year to calculate FCF 2019, FCF 2020, FCF 2021, and FCF 2022.
Forecast Future FCF
The subsequent step involves forecasting EEC's Free Cash Flows (FCF) from 2023 to 2028. These
forecasts are based on a set of assumptions, including:
• Revenue growth rate: The expected annual increase in the company's revenues.
• Operating expenses as a percentage of revenue: The proportion of operating expenses
relative to total revenue.
• Tax rate: The projected effective tax rate.
• Capital expenditure growth: The anticipated rate of growth in capital expenditures.
• Changes in working capital as a percentage of revenue: The proportion of working
capital concerning revenue.
Terminal Value (TV)
Post the projection period (2028), the Terminal Value (TV) is estimated. This is determined using
the Gordon Growth Model, with the following formula:
Terminal Value (TV) = FCF2028 x (1 + Terminal Growth Rate) / (Discount Rate - Terminal Growth
Rate)
Here, Terminal Growth Rate represents the perpetual growth rate, and the Discount Rate is the
Weighted Average Cost of Capital (WACC) of the company.
Net Present Value (NPV)
The Net Present Value (NPV) of the projected FCF and Terminal Value is then computed. NPV
reflects the present value of future cash flows, considering the time value of money. The formula
used for NPV calculation is:
NPV = ∑(FCFt / (1 + Discount Rate)^t) + (TV / (1 + Discount Rate)^t)
where 't' indicates each year in the projection period, and the Discount Rate is the company's
WACC. The summation of these present values provides the total NPV, representing the estimated
intrinsic value of Etihad Etisalat Company.
Assumptions:
• Current Revenues: The company's current revenues stand at $12,406 million.
• Current Capital Invested: The total capital invested in the company amounts to $20,000
million.
• Current Depreciation: Depreciation expenses for the current year are $233 million.
• Current Capital Expenditures: Capital expenditure for the current year is $298 million.
• Change in Working Capital in the Last Year: Working capital increased by $115 million
in the last year.
• Current Debt Outstanding: The company currently has no outstanding debt.
• Number of Shares Outstanding: There are 1,500 million shares outstanding.
High Growth Period (Years 1-5):
• Revenue Growth Rate: The company is expected to achieve a high growth rate of 25.00%
in revenues during the first five years.
• Operating Expenses as a % of Revenues in Year 5: Operating expenses, including
depreciation, are projected to be 70.00% of revenues in Year 5.
• No Debt Used for Financing Investments: The company does not plan to use debt for
financing its investments during this high-growth phase.
• Growth Rate in Capital Expenditures & Depreciation: Both capital expenditures and
depreciation are expected to grow at a rate of 25.00% during this phase.
• Working Capital as a % of Revenues: Working capital is anticipated to represent 7.50%
of revenues.
• Tax Rate: The company's effective tax rate is estimated to be 36.00%.
• Beta for Cost of Equity: The company's cost of equity is calculated using a beta of 1.25.
• Current Long Term Bond Rate: The prevailing long-term bond rate is 6.50%.
• Market Risk Premium: A market risk premium of 5.50% is used for cost of equity
calculations.
• Cost of Borrowing Money: The cost of borrowing is 8.50%.Stable Period (Years 6-10):
• Revenue Growth Rate: After the high growth period, the revenue growth rate is expected
to stabilize at 6.00% annually.
• Operating Expenses as a % of Revenues: Operating expenses are projected to be 75.00%
of revenues during the stable period.
 • Debt Used for Financing Investments: The company plans to use 5.00% debt for
financing its investments in this phase.
• Interest Rate of Debt: The interest rate on debt during the stable period is estimated to be
7.50%.
• Beta for Cost of Equity in the Stable Period: The beta used for cost of equity calculations
in the stable period is 1.10.
Estimated Cash Flows: The table below summarizes the estimated Free Cash Flows (FCFF) for
each year from Year 1 to Year 10. The growth in revenue and FCFF is presented along with the
assumptions for each year.
Year Growth in Revenue FCFF ($
(%) million)
1 25.00% 2,202
2 25.00% 2,664
3 25.00% 3,329
4 25.00% 4,162
5 25.00% 5,202
6 21.20% 6,503
7 17.40% 7,514
8 13.60% 8,451
9 9.80% 9,206
10 6.00% 9,671

Costs of Equity and Capital: The costs of equity and capital for each year are presented,
considering the cost of debt, the proportions of equity and debt, and the weighted average cost of
capital (WACC).
Year Cost of Proportion of After-tax Proportion of Cost of Cumulative
Equity Equity Cost of Debt Debt Capital WACC
1 13.38% 100.00% 5.44% 0.00% 13.38% 113.38%
2 13.38% 100.00% 5.44% 0.00% 13.38% 128.54%
3 13.38% 100.00% 5.44% 0.00% 13.38% 145.73%
4 13.38% 100.00% 5.44% 0.00% 13.38% 165.22%
5 13.38% 100.00% 5.44% 0.00% 13.38% 187.32%
6 13.21% 99.00% 5.31% 1.00% 13.13% 211.92%
7 13.05% 98.00% 5.18% 2.00% 12.89% 239.23%
8 12.88% 97.00% 5.06% 3.00% 12.65% 269.48%
9 12.72% 96.00% 4.93% 4.00% 12.40% 302.91%
10 12.55% 95.00% 4.80% 5.00% 12.16% 339.75%

Firm Valuation:
Based on the calculations, the estimated value of Etihad Etisalat Company (EEC) is $80,367
million. The company's capital structure does not include any outstanding debt, and thus, the entire
value of the firm is attributed to equity.
• Value of Firm: $80,367 million
• Value of Debt: $0 million
• Value of Equity: $80,367 million
• Value of Equity per Share: $53.58
Value of Firm Over the Years:
The value of the firm is projected over a ten-year period as follows:
Year Value of Firm
1995 80,367
1996 88,453
1997 96,954
1998 105,760
1999 114,703
2000 123,542
2001 132,250
2002 140,844
2003 149,448
2004 158,314

Conclusion:
In conclusion, the estimated value of Etihad Etisalat Company (EEC) is $80,367 million. This
valuation is based on the provided assumptions, including revenue growth rates, cost of capital,
and capital structure. The value of equity per share is calculated to be $53.58. This valuation
provides insights into the expected future performance and potential worth of the company over
the specified time frame.

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