Financial Statement Analysis DCF Homework
Step 1: Use company Freshpet, Inc. Ticker symbol (FRPT)
Review their financial statements on yahoo finance.
Step 2: Using the "Growing Perpetuity Formula" method of analysis:
P = C1/(R-g)
Determine what is the fair market value of the company based on "Free Cash Flow to the Firm" or "Operating Cash Flow" from the Statement of Cash Flows.
***NOTE: This method using a Growing Perpetuity Formula only works when the Discount Rate > Growth Rate.***
(When the Discount Rate < or = Growth Rate, the Formula
eaks down). Therefore, for the purpose of this assignment, it is important to make sure that your Discount Rate > Growth Rate.Â
Â
Step 3: Determine the Growth Rate by using "regression analysis" (using historical data to forecast the growth rate)Â
(To determine the growth rate, either use "Free Cash Flow" or "Operating Cash Flow" depending on which historical values are more consistent)
Step 4: Forecast the next year's Free Cash Flow or Operating Cash Flow (use the more conservative estimate)
Step 5: Using CAPM model determine the appropriate discount rate for your growing perpetuity equation. You can use 3% as your Risk-Free Rate and 10% as the Expected Market rate.
CAPM = Rf + B(Er - Rf)
Step 6: Determine the "Enterprise Value" of your company
Enterprise Value = Market Value of Equity + Market Value of Debt
(For the purpose of this assignment, you can disregard Minority Interest and Cash, and you can also assume that the Book Value of Liabilities = Market Value of Debt)
Step 7: (Final Step) Compare the value of your Growing Perpetuity Formula to the "Enterprise Value" for your company. Based on your calculation, is your company overvalued, undervalued, or fairly valued?