Now, you have to do something very challenging. We have to apply the concept of equity value and the methodology of DCF to a real case. The case of Old Winery, an Italian company which is not listed in the stock exchange could be interesting for a private equity investment. If you applied the formula that we know to calculate the equity value, the first problem is to know the cash flows of the company. We have the business plan of the company, we have four years of P&L statements, and from the P&L it's possible to calculate the four values of cash flow, relevant to apply the formula. If we have the four values of cash flows it's possible to discount them. In order so that we are able to calculate a present value, but to discount them we needed to calculate the WACC. To calculate a WACC, we need both the net cost of debt and the cost of equity. To calculate the net cost of debt, it's relatively easy. We have the corporate tax rate, which is at 35%, and the issue is only to calculate what is the cost of debt. We use the numbers we have in the balance sheet of the company and we divided the amount of inter-expenses, which is 300 by the amount of debt, which is 12,500. It is possible to calculate what is the cost of debt. 2.4% if we multiply by a tax shield is possible to have the net cost of debt which is 1.56%. But now, and it's much more complex if you remember from the previous clip, the problem is to calculate the cost of equity. To calculate the cost of equity we need some inputs, and we have these inputs. We need the risk premium, and the risk-free, and they are inserted in our sheets so we know them. The problem is to calculate the beta. To calculate the beta, we need some comparable companies, and as the company operates in the wine sector, we have a list of comparable companies that are relevant for the valuation of the company. From the list of comparable companies, it's possible to know what is their average beta and the average beta is 0.962. This is the average beta of these companies. The problem is to run the unlever and the relever process. To run the unlever process, we need the debt-to-equity ratio of this company, and if we have the debt-to-equity ratio of this company, it's possible to calculate the unlevered beta. If you have unlevered bets, it's possible to relever this beta using the debt-to-equity ratio of our company, Old Winery. If we insert the debt-to-equity ratio, it's possible to get to the value of beta, which is represented by 0.32. This value of beta is lower than the value of beta of the comparable companies because the debt-to-equity ratio of Old Winery is lower than the debt-to-equity ratio of the comparable companies. It is not a surprise. If you use this value of beta, and apply the formula of the cost of equity that you have to remember is cost of equity is equal to risk-free rate plus beta multiplied by risk premium minus risk free, it's possible to get to the cost of equity, which is 3.34%. Now we have the net cost of debt. We have the cost of equity, and it's easy to calculate the WACC, which is 2.25%. Now it's time to move to the terminal value calculation to calculate a terminal value we need an input. And the input is represented as you know by the G rate. The G rate we use is 0.25%. 0.25% means that expectation we have of the growth of the company after year four, in which we calculate a terminal value, is not very aggressive. This is the signal given by this kind of G rate equal to 0.25. Using all these inputs, it's possible to calculate a terminal value at year four. The inputs are represented by the cash flowing in year four by the WACC and the G growth rate equal to 0.25%, combining all together the terminal value is equal to 425 million Euros. But to come to an end of the equity value, we also need to consider the net financial position and to calculate it, we take numbers from the balance sheet. We do not have minorities, and is very common within private equity investment, plus a surplus asset, and in the case of Old Winery, we have some surplus assets in the balance sheet. Summing all these items all together, the equity value of Old Winery is equal to 437 million Euros. This is a valuation taken by the DCF. The problem we mentioned in the previous clip is that the best practice is to compare the equity value coming from the DCF, from comparables, and we have comparables, because comparables we used before to calculate beta. Comparibles are relevant to use multiples coming from the enterprise value. And using these multiples, we can calculate what could be the equity value of Old Winery, considering the parameters of transactions that happen in the market. There are two multiples that we decided to use and they are represented by enterprise value divided by sales, and enterprise value divided by EBITDA. In the first case the multiple it’s 6.72, in the second case is 25.23. If you use these two multiples, we can calculate what could be the enterprise value of Old Winery. In the first case, the enterprise value could be 334 million Euros, and in the second case 264 million Euros. In both cases it’s an enterprise value, so it makes sense to calculate an average, and it makes sense as well, obviously, to add the net financial position of minorities and the surplus asset of Old Winery. If we run this exercise, we can calculate the equity value for Old Winery using the multiples, it’s equal to 301 million Euros. What is the meaning of this equity value for multiples? The meaning is that if you apply the DCF, the equity value of Old Winery would be higher than the equity value the market is able to pay in a certain moment. So the game now from whatever kind of private equity is to be able to negotiate the right price, because we have two different signals. One signal coming from the DCF which is a sort of implicit value of the company, but we have a completely different signal coming from the market. And the issue to negotiate is a fundamental skill for any kind of PEI.
