Discounted Cash Flow Method

Because a business generates a stream of cash flows during its operations, its owners have an equity ownership claim on those future cash flows (John Burr Williams, 35-44 ,1938) The intrinsic values of Ryanair and EasyJet were calculated using the DCF model in the following steps: Selecting the kind of DCF model, (cash flow was defined as revenues, which were anticipated based on the premise that they would rise at a declining rate of 8-12% and there would be around p.a. The assumptions made includes the analysis of the performance of the two companies against its historical performance and that of its peers. Finally, the discount rate is estimated.

Revenues/ cash flows was calculated by growing the base year by a growth rate. EBITDA is a fraction of the Cash Flows Before Tax, Depreciation and amortization and thus found by multiplying the Revenues by Operating Margin. The non-current Assets for Easy jet had depreciated to 74% of its original value, it was assumed to continue the depreciation to 65% its original value in 2025.Tax was found by applying the tax rate of 30% to the EBIT and cumulative R&D revenues. FCFF is equal to sum of the difference between EBIT and cumulative R&D and depreciation & amortization and change in Working Capital. WACC is found by adding the cost of capital in high growth and cost of debt in stable growth period.

Firm value is the sum of P.V During high growth, P.V of Terminal value and value of cash and marketable securities. For a non 100% equity firm, a value is inserted as LT debt. Value of Equity is calculated by subtracting LT Debt (including ST portion of LTD) from the firm value. Finally, estimated share value is calculated by dividing the firm value of equity with no of shares which gave 9.27 for Ryanair and a 2.08 in the case of Easy Jet.

The expected value of a random quantity is the mean, or average, value of its possible outcomes, in which each outcome’s weight in the average is its probability of occurrence. See DeFusco, McLeavey, Pinto, and Runkle 270-280 (2004)for all statistical concepts used in this chapter. For simplicity, the discount rate in Equation 3 - 1 is represented as the same for all time periods (i.e., a flat term structure of discount rates is assumed).

2. Method 2; Comparables

The method of comparables applies to enterprise value multiples. Here, one evaluates the market value of an entire company in relation to some measure of value relevant to all providers of capital, not exceptionally equity capital providers. For instance, multiplying a benchmark multiple of enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (EBITDA) times an estimate of a company’s EBITDA provides a flash value of the entire company. Similarly, comparing a company’ s actual EV (enterprise value) multiple with it peers i.e its relevant benchmark multiple allows an assessment of whether the company is relatively fairly valued, relatively undervalued, or relatively overvalued. Various choices for the benchmark value of a multiple have appeared in valuation methodologies, including the multiple of a closely matched individual stock and the average or median value of the multiple for the stock’s industry peer group. The economic rationale underlying the method of comparables is the law of one price, the economic principle that two identical assets should sell at the same price.

To get the market price using this method analyst should appreciate the fact that enterprise value is total company value, the market value of debt, common equity, and preferred equity minus the value of cash and short - term investments. Therefore, EV/EBITDA is a valuation indicator for the overall company rather than solely its common stock Get the Enterprise of the firm in question by getting the product of its EBITDA and that of the EV of the Competitor’s divided by the competitors EBITDA then subtract the Long Term Debt and the preferred stock (subtract from EV of the firm in question). Finally, divide the value with the number of shares e.g from yahoo finance in our instance. Valuation indicator for the overall company rather than solely its common stock. However, the analyst can assume that the business’ s debt and preferred stock (if any) are efficiently priced, the analyst can use EV/EBITDA to draw an inference about the valuation of common equity. Such an inference is often reasonable. Analysts have offered the following rationales for using EV/EBITDA:

By adding back depreciation and amortization, EBITDA controls for differences in depreciation and amortization among businesses, in contrast to net income, which is post depreciation and post amortization. For this reason, EV/EBITDA is frequently used in the valuation of capital -intensive businesses (for example, cable companies and steel companies). Such businesses typically have substantial depreciation and amortization expenses. EBITDA also ignores the effects of differences in revenue recognition policy on cash flow from operations. Free cash flow to the firm (FCFF), which directly reflects the amount of the company’ s required capital expenditures, has a stronger link to valuation theory than does EBITDA. Only if depreciation expenses match capital expenditures do we expect EBITDA to reflect differences in businesses capital programs. This qualification to EBITDA comparisons may be particularly meaningful for the capital - intensive businesses.

Cash and investments (sometimes termed nonearning assets) are subtracted because EV

is designed to measure the net price an acquirer would pay for the company as a whole. The

acquirer must buy out current equity and debt providers but then receives access to the cash

and investments, which lower the net cost of the acquisition. (For example, cash and investments can be used to pay off debt or loans used to finance the purchase.) The same logic explains the use of market values: In repurchasing debt, an acquirer has to pay market prices. Some debt, however, may be private and it does not trade; some debt may be publicly traded. Finally, for Rynair and Easyjet, sum he firm value and equity value, subtract the sum of long term debt and short term securities to get share prices of 18.45 and 3.87 respectively.

References

Equity Valuation Calculation. (2004). 3rd ed. pp.270-280.

Pinto, J., Henry, E., Robinson, T., Stowe, J. and Cohen, A. (n.d.). Equity Asset Valuation. 1st ed.

Williams, J. (1970). International trade under flexible exchange rates. 1st ed. New York: Augustus M. Kelley.