Valuation | Simple Example | Discounted Cash Flow (DCW) | Company Name: Print Mario | Part II
"Every Story has a Number and Every Number has a Story" - Dr. Aswath Damodaran
1. Forecast Future Cash Flows with ReinvestmentWe calculate future annual profits after accounting for a 30% reinvestment to sustain the 25% growth rate.
2. Discount Future Cash Flows at 12%The present value of these future profits is calculated using a 12% discount rate:
5. Sum of Present Values
Total Present Value = Rs. 14,06,250 + Rs. 15,66,964.29 + Rs. 17,38,699.32 + Rs. 19,17,523.28 + Rs. 21,01,819.02 + Rs. 2,85,21,373.36
Therefore, when we account for a 30% reinvestment of profit and use a 12% discount rate, the valuation of Print Mario is approximately Rs. 3,72,52,629 (or about Rs. 37.3 million or Rs. 3.73 Crore) and not Rs. 65.25 million (Rs. 6.52 Crore).
- I try to study Dr. Aswath Damodaran and all my Valuation articles are motivated from insights and teachings from Dr. Aswath Damodaran. So, all credits to Dr. Damodaran and his teaching style.
- Year 1:
- Revenue = Rs. 60,00,000 × (1 + 25%) = Rs. 75,00,000
- Profit = Rs. 75,00,000 × 30% = Rs. 22,50,000
- Profit after Reinvestment = Rs. 22,50,000 × (1 - 30%) = Rs. 15,75,000
- Year 2:
- Revenue = Rs. 60,00,000 × (1 + 25%)^2 ≈ Rs. 93,75,000
- Profit ≈ Rs. 93,75,000 × 30% ≈ Rs. 28,12,500
- Profit after Reinvestment ≈ Rs. 28,12,500 × (1 - 30%) ≈ Rs. 19,68,750
- Year 3:
- Revenue ≈ Rs. 60,00,000 × (1 + 25%)^3 ≈ Rs. 1,17,18,750
- Profit ≈ Rs. 1,17,18,750 × 30% ≈ Rs. 35,15,625
- Profit after Reinvestment ≈ Rs. 35,15,625 × (1 - 30%) ≈ Rs. 24,60,937.50
- Year 4:
- Revenue ≈ Rs. 60,00,000 × (1 + 25%)^4 ≈ Rs. 1,46,48,437.50
- Profit ≈ Rs. 1,46,48,437.50 × 30% ≈ Rs. 43,94,531.25
- Profit after Reinvestment ≈ Rs. 43,94,531.25 × (1 - 30%) ≈ Rs. 30,76,171.88
- Year 5:
- Revenue ≈ Rs. 60,00,000 × (1 + 25%)^5 ≈ Rs. 1,83,10,546.88
- Profit ≈ Rs. 1,83,10,546.88 × 30% ≈ Rs. 54,93,164.06
- Profit after Reinvestment ≈ Rs. 54,93,164.06 × (1 - 30%) ≈ Rs. 38,45,214.84
2. Discount Future Cash Flows at 12%The present value of these future profits is calculated using a 12% discount rate:
- Year 1 Present Value = Rs. 15,75,000 / (1 + 12%) ≈ Rs. 14,06,250
- Year 2 Present Value ≈ Rs. 19,68,750 / (1 + 12%)^2 ≈ Rs. 15,66,964.29
- Year 3 Present Value ≈ Rs. 24,60,937.50 / (1 + 12%)^3 ≈ Rs. 17,38,699.32
- Year 4 Present Value ≈ Rs. 30,76,171.88 / (1 + 12%)^4 ≈ Rs. 19,17,523.28
- Year 5 Present Value ≈ Rs. 38,45,214.84 / (1 + 12%)^5 ≈ Rs. 21,01,819.02
- Terminal Value = Year 5 Profit after Reinvestment × (1 + 4%) / (12% - 4%) ≈ Rs. 38,45,214.84 × 1.04 / 0.08 ≈ Rs. 5,01,91,994.57
- Discounted Terminal Value = Rs. 5,01,91,994.57 / (1 + 12%)^5 ≈ Rs. 2,85,21,373.36
5. Sum of Present Values
- Total Present Value = Sum of Present Values of Year 1 to 5 + Discounted Terminal Value
- Year 1 Present Value ≈ Rs. 14,06,250
- Year 2 Present Value ≈ Rs. 15,66,964.29
- Year 3 Present Value ≈ Rs. 17,38,699.32
- Year 4 Present Value ≈ Rs. 19,17,523.28
- Year 5 Present Value ≈ Rs. 21,01,819.02
- Discounted Terminal Value ≈ Rs. 2,85,21,373.36
Total Present Value = Rs. 14,06,250 + Rs. 15,66,964.29 + Rs. 17,38,699.32 + Rs. 19,17,523.28 + Rs. 21,01,819.02 + Rs. 2,85,21,373.36
Therefore, when we account for a 30% reinvestment of profit and use a 12% discount rate, the valuation of Print Mario is approximately Rs. 3,72,52,629 (or about Rs. 37.3 million or Rs. 3.73 Crore) and not Rs. 65.25 million (Rs. 6.52 Crore).
- I try to study Dr. Aswath Damodaran and all my Valuation articles are motivated from insights and teachings from Dr. Aswath Damodaran. So, all credits to Dr. Damodaran and his teaching style.