# DCF Valuation

In the financial modeling series we have covered term loan schedule, depreciation schedule, tax schedule and an integrated financial model.This is probably the last link in the financial modeling series.

Here we have valued the company using the most widely used valuation technique called Discounted Cash flow (DCF) valuation method. We arrive at Free cash flow of firm (FCFF), discount it by Weighted average cost of capital (WACC) to present value to find the Enterprise value (EV) and then subtract net debt to get the Equity Value of the company.

I follow Prof. Damodaran of Stern NYU for valuation related queries.

# Excel file embeded in MS Outlook

For some reason one of my colleague wanted to embed the excel file attachment in the main body of outlook letter he was typing. However he  wasn’t getting through as the embedded image was large and showing content of file. The display as icon option was also not working.

Later we found by right clicking on the file image throws you option to convert the the file to other formats where the display as icon option is live. By selection the option the file is embed nicely in mail body.

I use office 2010.

# Economic Value Added

Analyzing equation:
EVA = Net Operating Profit after taxes (NOPAT) – Cost of Capital Employed (CoCE)

EVA=NOPAT – ( CE x WACC )

EVA/CE = NOPAT/CE – WACC

EVA/CE = ROIC – WACC

EVA = CE x (ROIC – WACC)

*ROIC – Return on Invested Capital, CE – Capital Employed

Therefore EVA can also be defined as spread between the return
on invested capital and the cost of capital times the amount of invested capital.

It appeared in HUL Annual Report 2012-13. Found it worth sharing.

EVA is residual income after charging the Company for the cost
of capital provided by lenders and shareholders.It represents the
value added to the shareholders by generating operating profits
in excess of the cost of capital employed in the business.

EVA will increase if:
a. Operating profits can be made to grow without employing
more capital, i.e. greater efficiency.
b. Additional capital’s invested in projects that return more
than the cost of obtaining new capital, I.e. profitable growth.
c. Capital is curtailed in activities that do not cover the cost of
capital, i.e liquidate unproductive capital.

EVA = Net Operating Profit after taxes (NOPAT) – Cost of Capital Employed (CoCE)

NOPAT is a company’s after- tax operating profit for all investors, including shareholders and debt holders or EBIT x (1-Tax%)

CoCE = Weighted Average Cost of Capital (WACC) x Average
Capital Employed

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# Chandoo.org KPI performance charts – My entry

Recently the contest entries of chandoo.org KPI performance charts & dashboards were published, the winner are yet to be announced. Many of the entries are amazing and great to learn from. I also participated in the contest and will discuss my entry today. The details of contest and other entries can be seen on the website. The contest was about showing variance analysis of KPI data from bank. I made an interactive chart in which the KPI could be selected from the dropdown.

The data in base, corresp, target shows variance only w.r.t to current. Green and pink bars show positive and negative variance respectively.

# Marginal percentage within a slab

Recently I was asked to make an incentive plan with following slabs. One who achieves his target within the slab will get corresponding percentage of his bonus.

Therefore someone who achieves his target with say 45% will get 25% of his bonus amount. Target achievement of above 100% will also get bonus as per highest slab. This task was fairly easy with nested if and easier with vlookup function.

However later it was discussed that it would be unfair to give same percentage of bonus to someone who achieve 45% and other 25% of his target. So it was decided that the percentage will be on pro-rata basis within that slab. Further anyone who achieves his target by more than 100% will get incremental 120% of his bonus for every one percent of target above 100%.

This task also would have been easier had the marginal increase was same but it was not. As you can see in the table below that marginal increase is different for different slabs.

The equation of a straight line y=mx+c and mighty vlookup function comes to our rescue here. I came up with following solution.

Helper column is same as lower limit of target. And yes one has to achieve 125% of his target to get 100% bonus amount in this case. You can update the table as per your need like not giving any bonus for 0-25% target or different slabs etc. Following is the link to file for your perusal…