The Free Cash Flow Business Valuation Model

Instructions: Change any of the forecasting variables shown in red below and observe the effect on the model's
outputs in the section below. To what variable is the business value conclusion most sensitive? To what variable
is it least sensitive?

The Discounted Free Cash Flow Model for a Complete Business

Pie In the Sky Company
Forecasting Variables:

2002 2003 2004 2005 2006

Revenue growth factor
Expected gross profit margin
S, G, & A expense % of revenue
Depr. & Amort. % of revenue
Capital expenditure growth factor
Net working capital to sales ratio
Income tax rate
Assumed long-term sustainable growth rate
Discount rate

2007

2008

2009

2010

2011

60%
54%
28%
10%
20%
15%

50%
55%
27%
10%
-10%
14%

40%
56%
26%
10%
-15%
13%

30%
57%
25%
10%
-20%
12%

20%
58%
24%
10%
-25%
11%

10%
59%
23%
10%
-30%
10%

2002 2003 2004 2005 2006

2007

2008

2009

2010

2011

50% 51% 52% 53% 54% 55% 56% 57% 58%

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59%
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20%
50%
50%
10%
40%
19%

30%
51%
40%
10%
35%
18%

40%
5% per year after 2011
20%

40%
52%
30%
10%
30%
17%

50%
53%
29%
10%
25%
16%
40%
5%
20%

Valuation Model Outputs:

Gross profit margin

Net operating profit margin
Free cash flow ($ mil)
Terminal value ($ mil)
PV of Company Operations ($ mil)

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Market Value of Company Assets ($ mil)

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The Discounted Free Cash Flow Model for a Complete Business

Pie In the Sky Company
Actual
1996

1997

1998 1999Q1

1,460

1,610

1,717

1999Q2
499

510

1999
2016.8

Total revenue

$2,400,000

$3,120,000

$4,368,000

652.8
1364

1,200,000
800,000

1,200,000
1,200,000

1,528,800
1,591,200

2,096,640
2,271,360

3,079,440
3,472,560

4,822,272
5,660,928

7,076,160
8,648,640

9,686,477
12,328,243

12,306,228
16,312,908

14,424,045
19,918,918

15,488,676
22,288,584

595.2
768.8

1,200,000
(400,000)

1,200,000
0

1,248,000
343,200

1,310,400
960,960

1,900,080
1,572,480

2,935,296
2,725,632

4,245,696
4,402,944

5,723,827
6,604,416

7,154,784
9,158,124

8,242,311
11,676,607

8,688,770
13,599,814

200,000

240,000

312,000

436,800

655,200

1,048,320

1,572,480

2,201,472

2,861,914

3,434,296

3,777,726

(600,000)

(240,000)

31,200

524,160

917,280

1,677,312

2,830,464

4,402,944

6,296,210

8,242,311

9,822,088

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240,000
(1,400,000)
76,000
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312,000
(1,890,000)
129,600
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436,800
(2,457,000)
212,160
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655,200
(3,071,250)
349,440
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468

496

540

168

159

992.5

1114.9

1177.3

330.6

351.4

Selling, general and administrative expenses

Earnings before interest, taxes, depr. & amort. (EBITDA)

436

505

518

142

156

556.9

609.8

659.1

188.5

195.9

335
(104)

405
(193)

458
2,115

123
384

159
890

565.2
2548.2
2751.8

Non-operating income

Earnings before Interest and taxes (EBIT)

Interest expense

Income Taxes
Net Operating Profit After-Tax (NOPAT)
Add back depreciation and amortization
Subtract Capital Expenditures
Subtract New Net Working Capital
Free Cash Flow

117.5

12.2

2316.8

449.2

926.7

Years Ending December 31

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2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

$2,000,000

Cost of Goods Sold

Gross profit

Depreciation and amortization

2001

146
23

202
(54)

223
883

54
144

69
352

245.4

-51.6

-136.4

1210.7

251.1

505.9

2506.4

200,000
(1,000,000)
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$6,552,000 $10,483,200 $15,724,800 $22,014,720 $28,619,136 $34,342,963

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1,048,320
(3,685,500)
589,680
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1,572,480
(3,316,950)
733,824
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2,201,472
(2,819,408)
817,690
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2,861,914
(2,255,526)
792,530
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3,434,296
(1,691,645)
629,621
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Terminal value, 2011

$37,777,260

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3,777,726
(1,184,151)
343,430
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Present Value of Free Cash Flows @ 20%

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Total Present Value of Company Operations

Plus Current Assets

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500,000

Total Market Value of Great Expectations' Assets

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from Pie in the Skys' December 31, 2001 Balance Sheet

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