Valuation using cash flows

1. Valuation using cash flows By jenniferkellner (Discount, Variety Stores Industry)

2. Discount, Variety stores industry Target Dollar General Wal-Mart Costco *Costco is least comparable

3. Objective: estimate the intrinsic value of target • To do so, we use the Discounted Cash Flow model: • STEPS • Review assumptions & multiyear forecasts from Module 4 • Determine FCF 2014 – 2017 using the above • Discounted cash flow model • = Enterprise Value ?

4. Step: Review forecasts and assumptions • Security breach, lower 2014 forecasted sales • Use this as a basis to determine FCF • NOTE: FCF = EPAT – ΔNEA • *A central assumption for our model

5. Step 2: determine FCF (Using: FCF = EPAT – ΔNEA) • Note that ΔNEA is positive above in each year & expected to keep increasing • Target expansion via Canada, SuperTarget remodeling, additional city stores • Note also that Target owns most stores (fewer operating leases)

6. ...from the 10k

8. Step 3: discounted cash flow model Discount Rate (Bloomberg Terminal): 6.80% • 2,766 = First yrof growing perpetuity grown at 4.6% • Divide this by the DR less sales growth rate • Discount back 4 years (assumed B.O.Y.) = 96,638 • Add Sum of PV cash flows to arrive at value of the firm

9. Target: • 105,248 Enterprise Value of the firm

10. Uncertainties • Why this value is likely inaccurate • Discount rate • Still an assumption, can change value dramatically • Sales growth rate • Also an assumption • Justifiable but lacks accuracy • Especially: current Target business env’t • 2013 sales are forecasted • 2013 10K not released yet

11. Questions?