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Henkel Integrative Case: Part V
Enterprise Value
Introduction
In this assignment, we value Henkel AG on an “as-is” basis using the discounted cash flow
(DCF) method. An as-is valuation assumes that forecast ratios remain at their current levels. An
as-is valuation allows you to focus on building the model instead of forecasting. It also provides
a starting point for a reasonable assessment of value. Once the model is built, you can then adjust
forecast ratios to better represent how the company is expected to change over time.
Instructions
To value Henkel on an as-is basis, we proceed in six steps. In step 1, prepare a set of reorganized
financial statements. To assure consistency, the reorganized financial statements should reconcile
(i.e., net operating profit less adjusted taxes [NOPLAT] to net income, invested capital to total
funds invested). Next, use the reorganized financial statements to calculate free cash flow. Free
cash flow equals NOPLAT plus noncash operating expenses less investments in invested capital.
In step 3, we recommend reconciling free cash flow to cash flow available to investors. Similar
to the reconciliation process for NOPLAT and invested capital, reconciling cash flows prevents
double counting or excluding critical cash flows. In step 4, create forecast ratios for each item in
NOPLAT and invested capital. Use these forecast ratios to project future NOPLAT, invested
capital, and consequently future free cash flow (step 5). In the final step, estimate the value of
core operations by discounting free cash flow and continuing value at the weighted average cost
of capital. To move from the value of core operations to equity value, add nonoperating assets
and deduct debt and debt equivalents. The specifics of the process are as follows:
1. Prepare reorganized financial statements. A robust DCF requires three reorganized
financial statements: NOPLAT and its reconciliation to net income, invested capital and
1
2. Compute free cash flow.1 Using the reorganized financial statements, calculate free cash
flow for the most recent year. Free cash flow is defined as NOPLAT plus depreciation,
less investment in working capital; plant, property, and equipment (PP&E); intangible
3. Reconcile free cash flow to cash flow available to investors (optional). To avoid double
counting or excluding critical cash flows, reconcile free cash flow to cash flow available
a. To reconcile free cash flow, start by adding after-tax nonoperating income and
losses (from the reconciliation of NOPLAT to net income). After-tax nonoperating
income includes restructuring charges, other nonoperating income, investment
b. To reconcile cash flow available to investors to sources of cash flow, compute the
change in debt, debt equivalents, equity, and equity equivalents (except retained
1 Exhibit 7.13 provides a free cash flow calculation for Home Depot. Exhibit 7.13 also reconciles cash flow
available to investors. Exhibit 31.24 provides a free cash flow statement for Heineken.
2
Advanced adjustments: In the cash flow key, we have treated actuarial gains and losses as
an offset to nonoperating assets (rather than an equity equivalent). We have also
4. Build forecast ratios.2 In the next step, compute an appropriate financial ratio for each
account in NOPLAT and invested capital (from the operating perspective). These forecast
2010E 2011E 2012E 2013E 2014E 2015E
6.0% 3.5% 3.5% 4.0% 4.0% 3.0%
For this assignment, calculate only five forecast years and one continuing-value year.
5. Forecast reorganized financial statements and free cash flow. Use the forecast ratios from
the previous step to forecast each line item in NOPLAT and invested capital (from the
6. Estimate enterprise value.3 In the final step, discount free cash flow and continuing value
using the weighted average cost of capital estimated in Assignment IV. To estimate
2 Exhibit 9.3 demonstrates how to build a forecast ratio and project a financial account.
3 Exhibit 6.4 provides an enterprise DCF summary for Home Depot. Continuing value can be found in Exhibit 6.10.
3
Congratulations—you are done!
4
