The value of Equity (excluding surplus assets) is calculated as the Present Value (PV) of the future notional dividend stream including a terminal value discounted at the Entities Cost of Capital (pre-growth). The terminal value is calculated by capitalising the projected notional dividend in year 10 at the Cost of Capital adjusted for estimated growth to perpetuity.

ValModel assumes that all surplus cash will be distributed to equity holders after providing for:

• funding of increasing working capital requirements; and
• maintaining a constant debt:equity ratio throughout.

The Enterprise Value is calculated as the PV of the Entities FCF to both debt and equity holders at WACC (pre-growth and post tax). After deducting opening debt, the resulting Equity Value is checked to the value calculated by discounting the dividend stream to equity holders. These will always be essentially equal.

The linking factor between the DCF valuation and the earnings based valuation is the factor of growth applied to calculate the capitalisation rate used to assess WACC and the resultant earnings multiplier (inverse of the capitalisation rate). Often, too little thought is given when assessing this critical factor. The appropriate rate to use is an estimate of “Growth in NOPAT to perpetuity”.

ValModel establishes this all important link and provides the nominal rate of growth (in NOPAT) that is required to reconcile the two valuation methodologies. This is achieved by calculating the growth implied in the DCF valuation and applying this to the Cost of Capital (as the component of WACC used to capitalise EBITA and modified to capitalise EBITDA ).

Other Outputs generated by ValModel (assuming all required data has been input), are:

• Ratio/Key Data Analysis;
• Sales trend analysis;
• The Business 10 year Forecast;
• Tables for insertion in the valuation report itself;
• A high level Executive Summary for quick reference.

The Ratios/Key Data Analysis provides a comprehensive analysis of ratios and key data including, inter alia:

• Historical growth rates for sales, NPAT and EBITA;
• Historical gross profit trends;
• Historical trends in normalised Fixed and Variable expenses;
• Various other measures of growth including NPAT and NOPAT;
• Other balance sheet ratios including;
  – Debtors days;
  – Creditors days;
  – Stock turn; and
  – Current ratio.
• Historic volatility in real earnings as a guide for the Valuer in the Discount Build;
• Working capital analysis;
• Calculation of Base Sales implied by the adopted FME.