Question

The next two questions use the data below. The data will be repeated on the next question: You have been tasked with building a stand-alone DCF valuation for Milner Beverages, a publicly traded company, using the unlevered two-stage approach. You calculate the following: $ in millions 2017 2018 2019 2020 2021 2022 2023 Unlevered free cash flow 110.0 120.0 150.0 170.0 200.0 250.0 280.0 In addition, you calculate the following: WACC = 8.00% Perpetuity growth rate (annual growth rate of unlevered free cash flows after 2023) = 3.00% Calculate enterprise value at the beginning of 2017 assuming all cash flows occur at year-end. Use whole numbers (i.e. 1 year exactly equals 1 period when calculating returns and discounting).

Answer 1

To calculate the enterprise value of Milner Beverages at the beginning of 2017, discount future unlevered free cash flows to their present value using the WACC as the discount rate, calculate the discounted terminal value beyond 2023, and sum these present values.

Step-by-step explanation:

To calculate the enterprise value at the beginning of 2017 for Milner Beverages, we first have to discount all future unlevered free cash flows (FCF) to their present values using the weighted average cost of capital (WACC) as the discount rate. For the years 2017 to 2023, we apply the present value formula for each year separately.

The present value (PV) of a future cash flow is given by the formula:

PV = FCF / (1 + WACC)t

Where FCF is the future cash flow, WACC is the weighted average cost of capital, and t is the time in years.

After calculating the present values for each year, we then need to calculate the terminal value, which represents the present value of all future unlevered free cash flows after 2023, assuming a perpetuity growth rate. This is done using the formula:

Terminal Value = FCF2023 * (1 + g) / (WACC - g)

Where g represents the perpetuity growth rate. We then discount this terminal value back to the present value at the beginning of 2017. Finally, we add up all the present values of the unlevered free cash flows up to 2023, including the discounted terminal value, to arrive at the enterprise value.

Note that this approach requires precision in present value calculations and understanding the importance of factors such as the interest rate, the perpetuity growth rate, and the choice of the discount rate.

Answer 2

the enterprise value at the beginning of 2017 for Milner Beverages is approximately $5,008 million.

To calculate the enterprise value at the beginning of 2017 using the unlevered two-stage DCF (Discounted Cash Flow) valuation approach, we'll follow these steps:

1. Calculate the present value of unlevered free cash flows (UFCFs) from 2017 to 2023.

2. Calculate the terminal value (TV) at the end of 2023.

3. Discount the terminal value back to the beginning of 2017.

4. Add the present value of UFCFs and the present value of the terminal value to get the enterprise value at the beginning of 2017.

Step 1: Calculate the present value of UFCFs from 2017 to 2023 using the WACC of 8.00%:

- UFCF at the end of 2017: $110 million

- UFCF at the end of 2018: $120 million

- UFCF at the end of 2019: $150 million

- UFCF at the end of 2020: $170 million

- UFCF at the end of 2021: $200 million

- UFCF at the end of 2022: $250 million

- UFCF at the end of 2023: $280 million

Now, discount each of these cash flows back to the beginning of 2017:

PV(2017) = $110 million / (1 + 0.08)^1 ≈ $101.85 million

PV(2018) = $120 million / (1 + 0.08)^2 ≈ $104.16 million

PV(2019) = $150 million / (1 + 0.08)^3 ≈ $124.18 million

PV(2020) = $170 million / (1 + 0.08)^4 ≈ $133.23 million

PV(2021) = $200 million / (1 + 0.08)^5 ≈ $149.02 million

PV(2022) = $250 million / (1 + 0.08)^6 ≈ $173.02 million

PV(2023) = $280 million / (1 + 0.08)^7 ≈ $182.14 million

Step 2: Calculate the terminal value (TV) at the end of 2023 using the perpetuity growth rate (3.00%) and the last year's UFCF (2023):

TV = UFCF(2023) × (1 + Perpetuity Growth Rate) / (Discount Rate - Perpetuity Growth Rate)

TV = $280 million × (1 + 0.03) / (0.08 - 0.03)

TV ≈ $280 million × 1.03 / 0.05

TV ≈ $5,460 million

Step 3: Discount the terminal value back to the beginning of 2017:

PV(TV) = $5,460 million / (1 + 0.08)^7 ≈ $4,202.45 million

Step 4: Add the present value of UFCFs and the present value of the terminal value to get the enterprise value at the beginning of 2017:

Enterprise Value (2017) = PV(2017) + PV(2018) + PV(2019) + PV(2020) + PV(2021) + PV(2022) + PV(2023) + PV(TV)

Enterprise Value (2017) ≈ $101.85 million + $104.16 million + $124.18 million + $133.23 million + $149.02 million + $173.02 million + $182.14 million + $4,202.45 million

Enterprise Value (2017) ≈ $5,008.05 million (rounded to the nearest million)

So, the enterprise value at the beginning of 2017 for Milner Beverages is approximately $5,008 million.