Question

The DCF can be used to estimate the value of future cash flows and the impact upon the current value of the stock price. As reported in Morningstar, Visa reported FCF of 11,995 (million) in 2018. To perform this calculation, we first calculate the Discounted Free Cash Flow. Using this information, we project the future cash flows based upon a fixed growth rate.

Assumptions for Calculations

Assumptions

FCF Annual Growth 15%

Discount Rate 8.0%

Shares outstanding 2231

Debt 16630

Cash 11709

In your initial response, critically analyze the assumptions, potential errors, and modifications you might make in your estimations for the valuation of Visa stock price.

Answer 1

Solution:

Considering that future cash flow of the company for next 5 years will grow at 15% per annum.

Step 1: Calculate present value of future cash flows for next 5 years.

Available free cash flow in 2018 was 11,995 million this will grow to 13,794.3 million in 2nd year and 20,979.3 in 5th year.

Present value of cash flows will be as follows:

Growth rate: 15%

Discounting rate: 8%

TCF: The “terminal cash flow,” or expected cash flow overall. This is usually an estimate, as calculating anything beyond 5 years.

Year	1	2	3	4	5
Future cash flow (FCF)	11,995.0	=11,995*1.15      13,794.3	=13,794.3*1.15 15,863.4	18,242.9	20,979.3
Preset value (PV)	=11,995/(1+0.8)^1 11,106.5	=13,794.3/(1+0.08)^2 11,826.3	12,592.9	13,409.1	14,278.2
Sum of all PVs for 5 years (a)	=11,106.5+11,826.3+12,592.9+13,409.1+14,278.2 = 63,212.9
Debt (b)	16,630
Cash balance (c )	11,709
Terminal cash flow (d)	Terminal cash flow can be assumed 3 times the value of PV at the end of 5th year. = 14,278.2*3 = 42,834.5
Valuation of the company (a+b-c+d)	= 63,212.9+16,630-11,709+42,834.5=110,968.5 Since cash is liquid asset hence same has to be subtracted for valuation
Stock outstanding (nos) (e)	2231
Stock value (a+d)/e	= 110,968.5/2231 = 49.7
Stock price with 10% Safety margin	= 49.7*.9 = 44.8