Valuation of dh company lê tiến dũng

ACADEMY OF FINANCE
MASTER TRAINING PROGRAM
UNIVERSITY OF TOULON
INSTITUTE OF BUSINESS ADMINISTRATION
INTERNSHIP REPORT
Subject: Business Valuation of Duyen Hai One Member Limited
Company
Lê Tiến Dũng
DEGREE: Master in Corporate Finance and Management Control
Tutor IAE Toulon: Jacques MARTIN
Tutor AOF: Vũ Xuân Dũng
Company representative: Duyen Hai One Member Limited Company
Year: 2013-2014
Year: 2013-2014
ACADEMY OF FINANCE
INTERNSHIP REPORT
Company
Lê Tiến Dũng
Year: 2013-2014
Year: 2013-2014
ACADEMY OF FINANCE
INTERNSHIP REPORT
Company
Lê Tiến Dũng
Year: 2013-2014
Year: 2013-2014

INDEX
ABBREVIATIONS4
I. SIGNIFICANCE OF THE SUBJECT AND INTRODUCTION TO DUYEN HAI COMPANY....1
A. Significance of the subject: Vietnamese Government’s Policy and the equitization process of
State owned enterprises. .............................................................................................................................1
B. Introduction to Duyen Hai one member Limited Company (A State enterprise)............................3
II. VALUATION METHODS AND APPLICATIONS IN DETERMINING THE VALUE OF DH
COMPANY................................................................................................................................................14
A. Book value (at 31st
December 2013)....................................................................................................14
a) Definition and formula 14
b) Advantages and disadvantages 14
c) Application to DH Company 15
B. Valuation methods that rely on cash flow: Discounted cash flow models (DCF) ...........................15
1. Basic principles 15
2. Free cash flow to the firm models (FCFF) 19
3. Valuation with the cost of capital. 28
4. Valuation with dividend discount model (DDM) follow Circular 202/2011/TT-BTC dated 30/12/2011
of Vietnam Ministry of Finance 40
C. Valuation methods that rely on a financial variable: Price multiples .............................................43
1. Basic principles 43
2. Price to earnings ratio (P/E) 45
3. Price to book ratio (P/B) 49

III. CONCLUSION...................................................................................................................................52
1. Determine the reasonable value of DH company ...............................................................................52
2. Proposal to Sate Owned Enterprises Valuation and Equitization Process......................................53
a. Combining valuation methods: 53
b. Develop database system for market 54
c. Establish risk assessment organizations: 54
d.Independent valuation institutions 55
e. Increase the stake allowed to be sold to investor 55
BIBLIOGRAPHY AND REFERENCES................................................................................................56
APPENDIX I..............................................................................................................................................57
APPENDIX II............................................................................................................................................73
APPENDIX III ..........................................................................................................................................78

ABBREVIATIONS
FCF Free cash flow
g growth
LIBOR the London interbank offered rate
P/B Price/Book ratio
P/E or PER Price/Earning ratio
P/S Price/Sales ratio
PEG P/E per growth rate ratio
r Discounted rate
Re the return in equity
Rf
the risk-free interest rate in the
economy
Rm
the expected return on the market
folio
T Tax
TV Terminal value
V Enterprise value
WACC
Weighted Average Cost Of
Capital
y yield to maturity
β Beta coefficient
P Profit

Master in Corporate Finance and Management Control- University of Toulon Vietnam2013-2014
1
Business Valuation of Duyen Hai one Member Limited Company – Lê Tiến Dũng letiendung1086@gmail.com
BUSINESS VALUATION OF DUYEN HAI ONE MEMBER LIMITED
COMPANY
I. SIGNIFICANCE OF THE SUBJECT AND INTRODUCTION TO DUYEN HAI
COMPANY
A. Significance of the subject: Vietnamese Government’s Policy and the equitization
process of State owned enterprises.
State owned enterprises (SOEs) equitization began in 1992, and since 2001 has been accelerated.
By the end of 2011, Vietnam have equitized nearly 4,000 enterprises. The number of SOEs
dropped from the original 12,000 to 5,655 in 2001. Now, there are only 1,309 enterprises wholly
owned by the State nationwide.
Basically, most SOEs are turning into joint stock companies, attracting more resources from the
society. More importantly, the management of these enterprises has been publicized.
State-owned enterprises equitized
Number
2000 211
2001 205
2002 164
2003 621
2004 856
2005 813
2006 359
2007 116
2008 74
2009 20
2010 17
2011 6
2012 13
2013 27
2014 (forecast) 196
2015(forecast) 236
Source: Ministry of Finance.

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Some data show that in 2011 – 2013 the number of SOEs equitized is very modest. There are
reasons such as the equity market yet to recover. Sluggish demand discourages enterprises to
offer stakes for sale. The decisive factor is the guidance of ministerial and local agencies, State
groups and corporations is not drastic enough.
Another reason is that policies, typically Decree 59/2011/ND-CP, only address some issues,
while others are arising such as corporate value assessment, which requires making land
management schemes that meet the prevalent regulations in order to reorganize and handle
properties in accordance with the Government’s decision, and then submitting to the local
authorities before carrying out corporate value assessment. This is yet to mention review of
liabilities, audit of value assessment results, and financial processing as for enterprises with
capital scale of over VND500 billion active in the fields the insurance, banking, post and
telecommunications, aviation and exploitation of coal, oil, gas and rare minerals, construction.
Administering agencies of the State economic groups and corporations spend much time and run
into many problems when trying to meet such requirements.
This year 2014, the government has expressed strong determination to accelerate the
privatization process, officially referred to as equitization. At a meeting on SOEs equitization in
Hanoi on early February, Prime Minister Nguyen Tan Dung said ministries should consider the
work as a main political task and implement it successfully. Any company leader that shows
“hesitation” during the process needs to be heavily disciplined, Dung said.
,0
100,0
200,0
300,0
400,0
500,0
600,0
700,0
800,0
900,0
2
State owned enterprises equitized
2
Number

3
The Government has approved most of the reorganization schemes.
According the reorganization schemes, there are only 1,309 wholly SOEs left. In the period from
now to 2015, 692 enterprises will remain their State wholly-owned status, and 573 will be
equitized.
Of these 573 SOEs, the State will hold dominant stakes of over 75% in 30 enterprises, over 65%
in 45 enterprises, over 50% in 108 enterprises and below 50% or no stake in 391 enterprises,
while 44 enterprises will be dissolved or restructured. Among the companies planned for
equitization this year 2014 are Vietnam Airlines, Vietnam Automobile Industry Corp., Waterway
Transportation Corp, Vietnam National Textile and Garment Group (Vinatex) and the leading
maker of building and construction materials Viglacera Corp.
In order to equitize 573 SOEs by 2015, some 150 enterprises must be equitized every year from
now. It is necessary to timely revise Decree 59 on land, audit, statistics, inventory, financial
processing, and handling redundant laborers.
Valuation is the problem that all the IPOs of state owned enterprises have been facing so far. The
theme of this report is to deal with the problem of evaluating Duyen Hai company, one state
owned enterprise.
B. Introduction to Duyen Hai one member Limited Company (A State enterprise)
Duyen Hai one member limited liability company (abbreviation: Duyen Hai Company) is a
defense business unit, on the basis of merging 6 subsidiaries and Song Hong company which
under 319 Corporation.
Duyen Hai Company was founded inheriting the achievements of companies with rich
experience in constructions and development: Enterprise No. 7, Enterprise No. 19, 359 JSC,
Enterprise No. 487, Van Chanh Enterprise, TK21 Enterprise, Song Hong Company. Most
companies had a history of over 20 years, especially 359 JSC was founded in 25th
March 1959.
Throughout the company’s history, the member units greatly contributed to achievements of 319
Company – The labor hero unit in the innovation period – currently known as 319 Corporation,
under Ministry of Defense, and it continues the tradition of the third Military Zone Armed force
which is “enrichment and winning”, positively contributes to the task of boosting defense
economy of the military and the country in the innovation period.

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The company has inherited and promoted the achievements of the units based in 9 coastal
provinces, cities, and northern delta – gateway to Hanoi Capital. The company locates in the
strategic economic development triangle of Hanoi, Hai phong, Quang Ninh, which is a favorable
condition for Duyen Hai Company for continuous grow up and “sustainable development”.
Duyen Hai’s member companies have operated many years in the market of northern delta
provinces and other strategic areas. With the competence and credibility, they have gained
confidence from partners in operating areas.
With the strategy of “Sustainable development”, Duyen Hai Company focuses on:
- Improving management and operation capacities.
- Enhancing the quality of the staffs, especially management teams, engineers, technicians
with high skills, gradual specialization for key and traditional business lines.
- Focusing on the following key business line:
1. Investment and trade in real estate.
2. Construction and installation of industrial and civil works, transportation, water
resources, hydropower, electrical network, power stations, and underground works.
3. Survey, detect, disarm bombs, mines, explosives; neutralizing the consequence of the
warfare.
4. Manufacture of construction materials.
5. Trading, import – export of material and equipment.
- Accelerate the appliance of science and technology in production lines, and investment in
comprehensive and modern equipments; ensure timely meet the customer’s demands in
company’s business lines.
- Fulfill the obligations to the State, the Ministry of Defense; implement well social
welfare regulations.
-
HEADQUARTER: 16B Nguyen Thai Hoc, Ha Dong District, Hanoi City.
Tel: 04-33824709; Fax: 04-33820984
Business code: 0105753635
- Company’s organization structure:
o Chairman cum Director: Colonel - Engineer Nguyen The Phang
o Vice Directors
o 8 Departments, Divisions; 15 units; 03 project management units, 02 subsidiaries.

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 Dependent Units
Branches of Duyen Hai One Member Co., Ltd:
1. Enterprise No. 7
2. Enterprise No. 19
5. Enterprise TK21
6. Van Chanh Enterprise
7. Southern Branch
8. Binh Minh Branch
9. Bach Dang Branch
10. Southest Branch
11. Hanoi Branch
12. Middle Branch
* Project Management Units
1. Project Management Unit No1:
2. Project Management Unit No2:
3. Demining Unit:
4. Apartment Management Unit of 16B Nguyen Thai Hoc:
 Subsidiaries
1. Song Hong Two Members Co., Ltd.
2. Duyen Hai Investment and Construction Consulting joint stock company.

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CONTROLLERS
DUYEN HAI ONE MEMBER
CO., LTD
CHAIRMAN CUM DIRECTOR
VICE DIRECTOR
ORGANIZATION CHART
DUYEN HAI ONE MEMBER CO., LTD. – MILITARY ZONE 3 / MOD
DIRECT MANAGEMENT
1. OFFICE
2. POLITICAL DIVISION
3. HR DIVISION
4. PLANNING - TECHNICAL
DIVISION
5. ACCOUNTING-FINANCIAL
DIVISION
6. LOGISTICS DIVISION
7. DEMINING DIVISION
8. PMU1
9. PMU2
10.APARTMENT MANAGEMENT
UNIT
INDEPENDENT UNITS
1. ENTERPRISE NO.7
2. ENTERPRISE NO.19
3. ENTERPRISE NO.359
4. ENTERPRISE NO TK21
5. ENTERPRISE NO.487
6. VAN CHANH ENTERPRISE
7. BINH MINH ENTERPRISE
8. BACH DANG ENTERPRISE
9. HANOI BRANCH
10. MIDDLE BRANCH
11. SOUTHEAST BRANCH
12. SOUTH BRANCH
SUBSIDIARIES
INVESTMENT AND CONSTRUCTION CONSULTING .JSC
SONG HONG CO.,LTD

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 Quality policy
a) Quality policy
“QUALITY DRIVES DUYEN HAI COMPANY FORWARD TO
SUSTAINABLE DEVELOPMENT”
Duyen Hai Company has converged the experience and reputation from 07 member
companies operating construction, industrial manufacture, business, trading, mining, real estate
investment, etc. Throughout its history of building, defending and growing, Duyen Hai member
companies have continuously strived to turn Duyen Hai into a company with enough capability
to conduct large scale projects, satisfy all the requirements of Employers. The company’s goal is
to build Duyen Hai Company brand name to be a reputable brand in the Military, Red River
delta area, and gradually develop the market and spread the brand to different national areas,
regions and other countries.
During its business, Duyen Hai Company always implements:
1. Strictly follow legal regulations, standards of the State, the Ministries, sectors and competent
authorities.
2. Gradually implement training, re-training, and create the best conditions for the staff to
improve their knowledge and skills; attract, recruit staffs satisfying all the requirements of
business.
3. Approach, research and effectively apply new & advanced technologies into the company’s
activities, improve work environments for employees.
4. Understand fully customer’s demands in order to satisfy the customers with company’s
products and services, keep schedule, progress, quality with the most competitive price.
5. Continuously enhance, expand the relationship with both local and foreign partners in every
business sectors.
b) Solutions to implement Quality policy
Ensure the company’s quality policy and the leaders’ commitments to be thorough
understood, performed and maintained by all employee.
1. Regularly keep in touch with the customers to fulfill all their demands.
2. Provide training, re-training, continuously enhance knowledge for all employees to acquire
the professional qualifications and produce excellent results for given tasks; and continuously
improve their performance to be “more professional, more effective”.

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3. Offering the best condition for all employees to approach, study, and apply advanced
technological solutions to result more high-quality output.
 Human Resources
- Total employees: 2,958.
 Regular personnel :899
Of which:
 Officers: 66
 Enlisted members: 156
 Defense workers: 133
 Long-term contracted employees: 544
 Short – termed employees: 2.059
 Qualification:
 Bachelor degree and above: 332
 College: 56
 Vocational school: 147
 Others: drivers, equipment & truck drivers, and workers
- Party Organization:
 01 central party organizations
 07 local party organizations
 06 local party cells
 44 local dependent party cells
 Total party members: 418
 Other information:
a. Achievements : During the last years, member companies under Duyen Hai Company
have always fulfilled the tasks assigned by the Central Party Committee of the Military
Forces, Ministry of Defense and the High Command of Military Zone 3. With its
contribution, and achievement, the company’s members have been appraised and given
prestigious awards, such as:
- 07 Victory Medals of first class, second class, and third class.
- 06 Labor Medals of first class, second class and third class.
- 05 Emulation flags of Ministry of Defense
- 08 Emulation flags of Ho Chi Minh Communist Youth Union Central Committee
- 02 Emulation flags of Vietnam General Confederation of Labor
- 02 Emulation flags of the General Department of Politics of Vietnam’s People Army

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- 03 Certificates of Merit of Ministry of Construction
- 15 Emulation flags of High Command Military Zone 3
- 15 Certificates of Merit from provincial and city People’s Committees
b. The company always fulfills tax obligations in compliance with the law.
c. Banks providing credits:
 Military commercial joint stock bank (MB)
 Bank for investment and development of Vietnam (BIDV)
 Vietnam bank for agriculture and rural development (Agribank)
 Vietnam Joint Stock commercial Bank for Industry and Trade (Vietinbank)
d. Main partners of the company
- 9 provinces under the Military Zone 3
- Central Highland provinces
- Southwest provinces
- Ministry of Transport
- Project Management Units – General Staff
- PMU of East Sea and islands
- Vietnam National Coal – Mineral Industries Holding Corporation Ltd.

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 Revenue and Financial Statement of the last 5 years:
From audited finance statement of Duyen Hai in Appendix I, we have:
a. Summary of Duyen Hai Balance sheet
Unit: Billion Dong
Year 2008 2009 2010 2011 2012 2013
Cash and cash
equivalents 85.3 67.1 124.6 48.2 60 93.6
Short term investments 0 43.2 0 0 27 0
Accounts receivable
short term 273.3 330.6 376.3 240.5 288.2 522.4
Inventories 132.4 142.8 170.5 225.9 313.7 386.8
Other current assets 19 22.9 39.8 56.7 38.8 42.9
Accounts payable 438.4 546.1 583.7 469 600.7 867.9
Short term borrowings
and liabilities 67.9 66.7 111.3 94.8 119 138.8
Long term borrowings
and liabilities 5.8 5.4 43.3 18.1 9.8 42.7
Debt 73.7 72.1 154.6 112.9 128.8 181.5
Equity 34.1 35.5 126.4 150.4 165.8 168
b. Summary of Duyen Hai Income statement
Unit: Billion Dong
Year 2009 2010 2011 2012 2013
Revenue 680.6 760.6 722.5 865.7 1065.4
Interest expense 4.8 10.2 14.2 13.4 11.5
Other income 0.4 0.6 1.9 1.7 1.2
EBIT 16 21.7 24.6 25.7 22
Net income before tax 11.2 11.5 10.4 12.3 10.5
Net income after tax (NI) 8.4 8.6 7.8 9.2 7.9
c. Investing activities and Depreciation
Unit : Billion Dong
Year 2009 2010 2011 2012 2013
Purchases and construction of fixed
assets and other long term assets
2.5 2.5 3 10.9 9.6
Investments in other entities 0 (2.5) (2.0) (0.5) 0.0
Investments 2.5 0 1 10.4 9.6
Depreciation 3.1 3.7 8.0 8.7 10.4
Note: Capital spending = Purchases and construction of fixed assets and other long-term assets
+Investments in other entities

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d. Business Efficicency
Unit : Billion Dong
Year 2009 2010 2011 2012 2013
Revenue 680.6 760.6 722.5 865.7 1,065.4
Total assets 653.7 864.7 732.3 895.3 1,217.4
Total liability 618.2 738.3 581.9 729.5 1,049.4
Equity 35.5 126.4 150.4 165.8 168.0
Gross profit 44.6 58.6 60.5 68.9 80.9
Net income 8.4 8.6 7.8 9.2 7.9
ROA 1.3% 1.0% 1.1% 1.0% 0.6%
ROE 23.7% 6.8% 5.2% 5.6% 4.7%
Gross profit to sales
ratio 6.6% 7.7% 8.4% 8.0% 7.6%
Net profit to sales ratio 1.2% 1.1% 1.1% 1.1% 0.7%
Liability to equity ratio 1741.4% 584.1% 386.9% 440.0% 624.6%
Like many companies in the construction and real estate sector, Duyen Hai use a large scale of
property in which a much large proportion of debt (2013, debt about sixty times larger than
equity), also a huge inventory. Duyen Hai has to raise funds from shareholders' equity or bank
loans.
Basic financial ratios of the construction industry and real estate sector in Vietnam
P/E 6.61
P/B 0.68
ROA 2.35 %
ROE 8.88 %
Net profit to sales ratio 2.97 %
Liability to equity ratio 323.39 %
Sales growth rate 16.63 %
Income growth rate -21.22 %
(Source : www.cafef.vn)
(link: http://s.cafef.vn/chi-so-nganh/3/731-bds-va-xay-dung.chn)
Construction and real estate Index is built up from 89 stocks of construction and real estate
companies on HOSE, using weighting capitalization method (the same way the VN Index). The
Index take the value of the base period is 100 points on 01/09/2011.

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The absolute value of the total equity of Duyen Hai at the end of 2013 is 168 billion dong,
while total assets is 1,217.4 billion dong, total debt is 1,049.4 billion, including debt is 181.5
billion. In the last five years, the company produce low profitability rate.
Duyen Hai has potentially huge risks if real estate market continues to be difficult in the next few
years. Assets of businesses can lose liquidity while debt may continue to rise.
Chart 1 Business Efficiency
In below chart : decimal separator(,) ; thousands separator (.)
0
200
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1200
1400
1
0
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800
1000
1200
1400
Total assets
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1 2 3 4 5
1 2 3 4
Total assets Total liability Liability to equity ratio
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Revenue
Total assets
Equity
00%
200%
400%
600%
800%
1.000%
1.200%
1.400%
1.600%
1.800%
2.000%
5
Liability to equity ratio

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0
20
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60
80
100
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180
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1,00%
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1,40%
1 2 3 4 5
13
0,00%
5,00%
10,00%
15,00%
20,00%
25,00%
5
ROE
Total assets
Net income
ROA

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II. VALUATION METHODS AND APPLICATIONS IN DETERMINING THE VALUE
OF DH COMPANY
A. Book value (at 31st
December 2013)
a) Definition and formula
Book value refers to the total amount a company would be worth if it liquidated its assets and
paid back all its liabilities. Book value can also represent the value of a particular asset on the
company's balance sheet after taking accumulated depreciation into account.
Book value is calculated by taking a company's physical assets (including land, buildings,
computers, etc.) and subtracting out intangible assets (such as patents) and liabilities --
including preferred stock, debt, and accounts payable. The value left after this calculation
represents what the company is intrinsically worth.
Thus, book value is calculated:
Book value = total assets - intangible assets - liabilities
b) Advantages and disadvantages
Advantages
1. It depicts the current net asset value of the firm. It is the total value of the company's assets
that shareholders would theoretically receive if a company were liquidated. It is easy to
calculate.
2. By being compared to the company's market value, the book value can indicate whether a
stock is under- or overpriced.
Disadvantages
Firstly, difficulty in determining the asset values to use because figures of individual asset may
vary significantly depending on whether it is valued on a going concern or a break-up basis. For
example, asset can be valued using historic, replacement and realizable basis and the accuracy
depends on which one chosen.
Secondly, a company’s balance sheet will not always include all its assets and liabilities; it
may even exclude those assets which are of most importance to generating revenue. A
cursory glance at the published financial statements of law firms set up as LLPs, for example,
provides testament to this. The 2011 financial statements of one ‘magic circle’ firm showed that
it had total assets of around £800 million, of which the largest balances were ‘client and other
receivables’ (i.e. unpaid bills – c. £500 million), ‘cash and cash equivalents’ (c. £100 million)
and ‘property, plant & equipment’ (i.e. office buildings, computers, and perhaps the contents of
wine cellars….c. £110 million). The most important assets of all – its know-how and its

15
relationships and reputation with current or prospective clients, employees and suppliers –
appear nowhere on the balance sheet. Whilst such an omission may be in accordance with
accounting conventions, users seeking to use financial statements to value companies need to be
aware of this, and recognize the limitations of focusing only on reported asset values.
Referring again to the law firm example, it is not the firm’s offices, whiteboards and artwork
which, in isolation, drive revenues but rather these assets used in combination with the human
element. Allowing for some important exceptions, the critical point to be aware of is this: future
profits/ cash flows, payments of dividends etc, that result from the assets being put into use
by labor, are what usually drives a business’s value; the value is not simply the net of assets
and liabilities. This example demonstrates clearly why the asset-based approach is sometimes
not appropriate for established companies with a significant workforce in place or with
significant intangible assets that are not recognized as assets in the company’s balance sheet.
It is for the above reasons that the asset-based approach will often be most suitable for
companies whose value is largely determined by its tangible assets such as mining companies.
Where a company’s fortunes are strongly dependent on less tangible factors such as customer
relationships, entrepreneurial decision-making, a skilled work force etc, the asset-based approach
may be less useful to determining a business’s value and/ or profitability.
c) Application to DH Company
Equity of DH at Dec 31st
2013 = Assets – Liabilities = VND 168 billion
Assessment: DH has a great scale of equity in book value. Due to nature activities in the field of
construction and real estate, the company has to use huge resources, mainly tangible fixed assets.
B. Valuation methods that rely on cash flow: Discounted cash flow models (DCF)
1. Basic principles
This valuation model was developed since 1990 by the American firm Mc Kinsey, based on
academic work founding of Sharpe, Modigliani and Miller, Gordon and Shapiro, and Markowitz.
This is the essential reference for valuation, due to the future projections and considered
assumptions.
The principle underlying DCF valuation is simple: the value of a company is the present value of
its expected cash flows. We can forecast the cash flow generated by the business in the future,
and the discount these forecasted cash flows back to present at an appropriate rate of return. The
DCF estimate of enterprise value can be represented mathematically as:

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Enterprise value = C1 (1 + r) -1
+ C2 (1 + r) -2
+ C3 (1 + r) -3
+ ...
where C1 is the cash flow we expect the company to generate one year from today, C2 is the
expected cash flow in two years, C3 is the expected cash flow in three years, and so on. Our
measure of cash flow is referred to as free cash flow, which defines in the following paragraph.
The variable r represents the discounted rate used to determine the present value of a future cash
flow. It may be regarded as the appropriate rate of return on the business, and is also known as
the hurdle rate, required return, opportunity cost of funds or cost of capital. It is most common to
use annual cash flow and discount rates in a business valuation, but the same approach can be
applied to quarterly or monthly time intervals.
It is not practical to forecast a cash flow stream over an infinite time horizon, so DCF models
generally forecast cash flow over a finite number of years and then estimate a terminal value.
The terminal value is the estimate of the price at which you can sell the business at some future
date. The most common way to estimate a terminal value is to assume that the company will
eventually mature and reach a moderate, steady-state grow rate. We can the compute the
terminal value as the present value of growing perpetuity, which is appropriate for cash flow that
grows forever at a constant rate g. The terminal value (TV) of a growing perpetuity T years in the
future is given by: TVT = [CT (1 + g)] / (r – g), where CT is the cash flow generated in year T, g is
the constant growth rate, and r is the discount rate.
Our formula for the company's enterprise value can now be written as the present value of the
cash flow generated over a future time horizon of T years plus the present value of the terminal
value TVT:
Enterprise value = C1 (1 + r) -1
+ C2 (1 + r) -2
+ ... + CT (1 + r) -T
+ TVT (1 + r) -T
The first T years of our forecast horizon typically represent a period of high growth and
transition, after which the company is expected to operate in a constant growth period. The
formula above implies that the value of a business (i. e., the enterprise value) can be estimated as
a present value of the cash flow it is expected to generate over time.
• More on the growth rate
Most DCF models assume that cash flows will eventually growth at a constant rate. If a company
operates in a mature and stable industry, it may already be in a constant growth phase. If this is
the case, the formula for enterprise value simplifies to:
Enterprise value = [FCF0 (1 + g)] / (r – g)
Where FCF0 is the free cash flow generated by the company in the most recent year, g is the
constant growth rate, and r is the discount rate. What is a reasonable estimate for the growth rate
of a mature business? A good stating point is the growth rate of the overall economy. In the

17
United States, estimates in the range of 3 to 5 percent are common, in Europe it is perhaps less.
In France is about 2.5 %.
Younger companies often experiences high-growth rates for several years before maturing.
When evaluating a high growth business, we need to make an assumption regarding the length of
the high-growth period. How long will it take such as a business or industry to mature and reach
constant growth? Obviously, no one knows for sure. It is typical to use an estimate of between
five and ten years for the high-growth period.
How can we estimate the growth during the high-growth period? One way is to examine the
company's growth rate in recent years. Of course, this raises the question of what we mean the
refer to the company's growth rate. Sales, earnings, cash flow, and other financial characteristics
will all experience different growth rates over time. In the long run, however, everything has to
grow at the same rate, on average. If earnings grow faster than sales, this implies that the
company's profit margin is increasing over time. Although profit margins do indeed change from
one year to the next, they tend to be fairly stable for most companies in the long run, suggesting
that sales and earnings will grow at the same rate. The next table presents suggested guidelines
for the DCF framework based on the type of grow at the same rate.
Type of company High-growth
period
Long-term
growth rate
Stable and mature 0 year 3 %
Moderate growth, with reasonable prospect for
additional products or customers
5 years 5 %
High-growth company in a dynamic industry
characterized by emerging technologies
10 years 7 %
• More on the discount rate
The discount rate is used to determine the present value of future cash flow. Conceptually, it
represents the rate of return that would be required by an investor in the company. The enterprise
value is inversely related o the discount rate: if a higher discount rate is used, the enterprise value
will be lower. Recall that for a stable company, our formula enterprise value is
Enterprise value = [FCF0 (1 + g)] / (r – g)

18
Consider a stable company that generated $ 10 million in cash flow in the most recent year and is
forecast to grow at 3 % a year forever. At a 10 percent discount rate, the enterprise value would
be $ 10 million  1.03 / (0.10 – 0.03) =, which is $ 147 million.
At 9 %, 10 %, 11 %, we have:
Inverse relation between Discount rate and Enterprise value
Discount
rate
Enterprise
value million
9 % $ 172
10 % $ 147
11 % $ 129
The effect of change in the discount rate is striking. What discount rate should be used to value a
company? This brings us to an important relationship in valuation: the link between risk and
return. Riskier companies should be valued using higher discount rates (15 % at less), and lower
discount rates should be used for stable companies that represent safer investments.
To estimate a discount rate, we can use historical returns on stocks and bonds as a starting point.
The exact values depend on the time period that studied and the industry in which the company
operates, but broad averages are a reasonable approximation. The discount rate applicable for a
specific company depends on how is financed, the mix of stocks and bonds that represents the
company's capital base. The formal term used to refer to the discount rate applicable to a given
company is the cost of capital.
Rather than construct a detailed estimate of cost of capital, we adopt a simple guideline for the
discount rate used in business valuation (Valuation and cost of capital). For a typical business,
we use a discount rate of 10 percent, a value that it close to the average for most companies in
the world. For a high-risk business, we use 15 percent. Most business owners or potential
investors would not describe their industry as low risk. However, if that description is
appropriate, we can use a lower discount rate, such as 8 percent. There is no magic in these
guidelines for discounts rates; they simply represent returns that have been earned historically on
business in different risk categories. Once you understand the basic principles of DCF valuation,
it is quite easy to estimate how much a company is worth using a broad range of discount rates.

19
Remember that the discount rate has not been greater than your long-term growth rate. If it is
not, then your terminal value estimate, and thus your value estimate today, will be infinite.
The main advantage of using of DCF method of valuation is in this soundness. In other words,
a company should be worth the present value of its expected future cash flows. In addition, the
DCF approach requires us to think carefully about the company's future prospects.
The main disadvantage of DCF valuation is the requirement to make assumptions about the
components of free cash flow, the cost of capital, and growth rates. Unreasonable assumptions
lead to unreasonable results. For high-growth companies, most the value today is driven by the
terminal value, which is quite sensitive to our assumed value for the long-term growth rate. In
addition, the discounted cash flow approach requires an understanding of the time value of
money, and the calculation can be somewhat complex for a novice.
Discounted cash flow (DCF) valuation is certainly not easy, and the results depend critically on
the assumptions we make. However, this does not mean that we should not use this method to
value a business. To use the DCF method, we need to forecast the free cash flow that a company
will generate in the future, both in the near term and in the long run. For the long run, we usually
assume that the company will experience a constant growth rate when it matures and reaches
steady state. We also need to determine the appropriate discount rate to value the future cash
flows. Finally, we need to understand the effects of change in our model assumptions on the
underlying value estimate.
2. Free cash flow to the firm models (FCFF)
The discounted free cash flow to the firm model for valuation requires (Rodić & Filipović,
2010):
 Project free cash flow to the firm
 Calculate discount rate
 Discount the projected cash flows
 Determine the growth rate
 Calculate the residual value of the firm
 Discount the residual value of the firm
 The value of the debt at the date of the valuation should be deduced from the sum of the
present value of projected cash flows and the present value of the residual so the value of
the equity will be obtained.

20
The free cash flow to the firm represents a cash flow available to those who provided
shareholders and creditors with the capital necessary for business operations, and after all
necessary investments in net working capital and fixed assets are conducted (Stowe, Robinson,
Pinto, & MeLeavey, 2002). This is also a difference between free cash flow to equity and free
cash flow to the firm and new projected debts. Namely, free cash flow to the firm does not take
cash expenditures for interest and debt into account, whereas they are not neglected in the case of
calculating free cash flow to equity (Damodaran, 2002).
Our formula for free cash flow to the firm (FCFF) is:
FCFF = EBIT (1 – T) + noncash expenses – capital spending – investment in working
capital
The first term in the free cash flow is the company's after-tax operating income and is computed
by multiplying earnings before interest and taxes (EBIT), which is also more commonly known
as Income from operations or Operating income, by 1 minus the company's effective tax rate. We
calculate operating income as revenues minus operating expenses. Since some operating
expenses (most notably depreciation and amortization) are noncash in nature, we add them back
when calculating free cash flow. We subtract the amount of capital spending, since these
investments (such as the purchase of machinery) affect cash flow but are not recorded as
expenses on the income statement. Similarly, we subtract the Investment in working capital.
Increase in accounts receivable or inventory decrease cash flow, but theses are not recorded on
the income statement (recall that the purchase of inventory will eventually get recorded as cost of
goods sold when the associated sale of products is reported). Our definition of free cash flow
represents the cash that the company can pay to all of its security holders (bondholders and
stockholder) on a continuing basis over time. Other references to free cash flow sometimes
distinguish between the terms levered and unlevered free cash flow, or between free cash flow to
equity and free cash flow to the firm. For comparison purposes, our definition above is
interpreted as unlevered free cash flow or free cash flow to the firm. Free cash flow is sometimes
negative, for example for start-up companies that make little in operating income, yet still make
significant capital investments. But in a DCF valuation model, experiencing negative free cash
flow for one or more years does not necessarily present a problem, as long as cash flow
eventually turns positive.

21
As mentioned above in DCF principles:
Advantages
 The value of the firm is based on projected future results, rather than assets.
 Useful when future results are expected to be different (up or down) from recent history.
Disadvantages
 Calculation relies on cash flow and discount rate figure which may be unavailable.
 Projections are not guarantees; unforeseen future events can cause income or earnings
projections to be completely invalid. The valuation assumes discount rates, growth rates,
inflation and tax are consistent through the period, which may not be the case.
Let's use the financial statements of Duyen Hai, presented in chapter I. For the first element of
the FCFF, we turn to the income statement:
 Summary of Duyen Hai Balance sheet
Unit: Billion Dong
Year 2008 2009 2010 2011 2012 2013
Cash and cash
equivalents 85.3 67.1 124.6 48.2 60 93.6
Accounts receivable
short term 273.3 330.6 376.3 240.5 288.2 522.4
Inventories 132.4 142.8 170.5 225.9 313.7 386.8
Accounts payable 438.4 546.1 583.7 469 600.7 867.9
and liabilities 67.9 66.7 111.3 94.8 119 138.8
and liabilities 5.8 5.4 43.3 18.1 9.8 42.7
Debt 73.7 72.1 154.6 112.9 128.8 181.5
Equity 34.1 35.5 126.4 150.4 165.8 168
 Summary of Duyen Hai Income statement
Unit: Billion Dong
Year 2009 2010 2011 2012 2013
Revenue 680.6 760.6 722.5 865.7 1065.4
Interest expense 4.8 10.2 14.2 13.4 11.5
Other income 0.4 0.6 1.9 1.7 1.2
EBIT 16 21.7 24.6 25.7 22
Net income before tax 11.2 11.5 10.4 12.3 10.5

22
Net income after tax (NI) 8.4 8.6 7.8 9.2 7.9
 Investing activities and Depreciation
To identify DH's investing activities, we examine operating activities on the cash flow statement.
The company reported the following items in this category.
Unit : Billion Dong
Year 2009 2010 2011 2012 2013
Purchases and
construction of fixed assets
and other long term assets
2.5 2.5 3 10.9 9.6
Investments in other
entities
0 (2.5) (2.0) (0.5) 0.0
Capital spending 2.5 0 1 10.4 9.6
Depreciation 3.1 3.7 8.0 8.7 10.4
Note: Capital spending = Purchases and construction of fixed assets and other long-term
assets +Investments in other entities
 Working capital
We excluded financial assets or financial liabilities (cash, short-term investment and short-term
debt) from the NWC calculation. We only calculate the value of assets serving core business
activities of Duyen Hai
Working capital = (Accounts receivable + inventory + other short-term assets) – Accounts
Payable
Year 2008 2009 2010 2011 2012 2013
Accounts receivable 273.3 330.6 376.3 240.5 288.2 522.4
Inventory 132.4 142.8 170.5 225.9 313.7 386.8
Other short-term assets 19 22.9 39.8 56.7 38.8 42.9
Accounts Payable 438.4 546.1 583.7 469 600.7 867.9
Working capital -13.7 -49.8 2.9 54.1 40 84.2
Investment in working capital -36.1 52.7 51.2 -14.1 44.2
Note: The first criterion is whether the reported number, is significant, whether it will have a
material effect in our estimate of the worth of the company. Some miscellaneous items can be
very small relative to other entries, and their inclusion or exclusion will not have a significant
effect on our estimate. The second is whether the items are recurring, whether the company is
likely to encounter the item going forward. Special one-time expenses such as restructuring

23
charges should be excluded if they are unlikely to occur again in the future. Remember that the
valuation is a forward-looking exercise, and the reason that we care about free cash flow in the
past is that will help us to estimate free cash flow in the future. In this report, I assume that the
earn-out payments (Receipts of loans given, dividends and profit shared) are not likely to be
present in DH future years, so I ignore them.
 Free cash flow to the firm
capital
We can assemble the various components and calculate DH's free cash flow as table below:
Unit: Billion Dong
Year 2009 2010 2011 2012 2013
EBIT 16 21.7 24.6 25.7 22
EBIT(1-T) 12 16.275 18.45 19.275 16.5
Noncash expenses 3.1 3.7 8 8.7 10.4
Investment in working
capital -36.1 52.7 51.2 -14.1 44.2
Free cash flow to the firm 48.7 -32.725 -25.75 31.675 -26.9
Compare FCFF and NI
Unit: Billion Dong
Years 2009 2010 2011 2012 2013
Net income 8.4 8.6 7.8 9.2 7.9
FCF 48.7 -32.7 -25.8 31.7 -26.9
Chart 2 FCFF – Net income
-40
-30
-20
-10
00
10
20
30
40
50
60
2009
23
capital
Unit: Billion Dong
Year 2009 2010 2011 2012 2013
EBIT 16 21.7 24.6 25.7 22
EBIT(1-T) 12 16.275 18.45 19.275 16.5
capital -36.1 52.7 51.2 -14.1 44.2
Compare FCFF and NI
Unit: Billion Dong
Years 2009 2010 2011 2012 2013
Net income 8.4 8.6 7.8 9.2 7.9
FCF 48.7 -32.7 -25.8 31.7 -26.9
2009 2010 2011 2012 2013
Net income
FCF
23
capital
Unit: Billion Dong
Year 2009 2010 2011 2012 2013
EBIT 16 21.7 24.6 25.7 22
EBIT(1-T) 12 16.275 18.45 19.275 16.5
capital -36.1 52.7 51.2 -14.1 44.2
Compare FCFF and NI
Unit: Billion Dong
Years 2009 2010 2011 2012 2013
Net income 8.4 8.6 7.8 9.2 7.9
FCF 48.7 -32.7 -25.8 31.7 -26.9
Net income

24
we can explain negative FCFF as follows: due to the scale of capital (include total liabilities and
equity) was continually increasing to grow business over the last few years (spent too much in
investment) therefore Duyen Hai has generated negative cash flow to the firm although the
company has made profit annually, we can see that on the chart below:
Chart 3 Revenue – Total assets – Equity
 Estimate the enterprise value and equity value of Duyen Hai
Unit: Billion Dong
Year 1 2 3 4 5
FCFF 48.7 -32.7 -25.8 31.7 -26.9
Duyen Hai has generated a negative FCFF -26.9 billion dong in free cash flow in the most
recent year, also in 2010 and 2011, but in 2009 and 2012 Duyen Hai generated a considerable
positive FCFF, 48.7 and 31.7 billion dong, respectively. We have to forecast the FCFF that
Duyen Hai generates in 2014, reasonably.
We should also remember that if the business has negative free cash flow, it does not completely
mean that this is not a good business. The reason is that the firm may have spent too much in
investment. If this is high potential investments, you can see right after a few years, free cash
flow was negative (-) and then the business has very strong positive cash flow (+). In the last few
years (2009-2013), Duyen Hai has spent too much in investment. Investment in working capital
of Duyen Hai in 2010: VND 52.7 billion, 2011: VND 51.2 billion, 2013: VND 44.2 billion and
this leads to negative cash flow in these years, on the other hand, in 2009 and 2012 Duyen Hai
has a very strong positive cash flow VND 48.7 billion and VND 31.7 billion, respectively.
,00
200,00
400,00
600,00
800,00
1000,00
1200,00
1400,00
24
Unit: Billion Dong
Year 1 2 3 4 5
FCFF 48.7 -32.7 -25.8 31.7 -26.9
,00
200,00
400,00
600,00
800,00
1000,00
1200,00
1400,00
1 2 3 4 5
Revenue
Total assets
Equity
24
Unit: Billion Dong
Year 1 2 3 4 5
FCFF 48.7 -32.7 -25.8 31.7 -26.9
Revenue
Total assets
Equity

25
The assumption is that in the next year Duyen Hai will not further expand business activities,
not increase total assets and the total debt, so the free cash flow tend to increase in the next year.
Cautiosly, we forecast Duyen Hai will generate a free cash flow of VND 10 billion in 2014.
Four stages of a company’ life cycle:
- The first is the start-up stage, in which the industry of company is in its infancy. Sales are generally low, and
earnings are negative because of start-up costs. Cash flows are also negative since the company is making
significant investments to put assets in place.
- Next comes the rapid rapid-growth stage, which is characterized by significant growth in sales and profit margin.
Earnings are often positive in this stage, but cash flows might still be negative, depending on the company's
investment needs. The company enjoys relatively high profit margins and may begin to attract competitors.
- Later, industries enter the maturity stage. By now, growth has slowed, and profit margins may have narrowed as a
result of competition. Cash flows are often positive, as companies generate significant operating cash flow that is
more than adequate to fund their investment needs.
- The final stage is on of decline. In this last stage, sales and profit begin to decrease. Cash flow is still positive as
long as asset requirement are modest. Some companies never reach the stage of decline, but instead operate in a
protracted stage of maturity, maintaining a modest growth rate for a long period of time.
When forecasting financial statements, one of our first tasks is to identify the stage of the life cycle that appropriate
for the given companies. This will drive many of our assumptions. It is useful to consider the age of the industry and
the company, along with the level of competition. The duration of each stage of the life cycle will vary based on
industry and company characteristics. It is also very important to consider the extent to which the company has
created a sustainable competitive advantage, the ability to earn returns that exceed the cost of capital over and
extended period of time. The grater the company's sustainable competitive advantage, the more likely is to be able to
maintain relatively high growth rates and profit margins.
With over 40 years of operation and low rate in ROE and ROA in the last 5 years, we can
assume that the life cycle of Duyen Hai in stage 3, maturity stage:
Chart 5 Equity – Net income
,00
20,00
40,00
60,00
80,00
100,00
120,00
140,00
160,00
180,00
1
25
1 2 3 4 5
Equity Net income ROE
25
00%
05%
10%
15%
20%
25%
5

26
Chart 6 Duyen Hai life cycle
The FCFF of company is expected to grow at 3 % per year in the next five year (2014-2018) and
then at 1% in the long term (from 2019 onwards). The company is financed by 181.5 billion
dong in debt with 10.7% interest rate from Military Bank but the interest rates tend to decrease in
next years, so the cost of capital is 10% in the next five year (2014-2018) and then, 8% in the
long term (from 2019 onwards).
Free cash flow to the firm
We estimate the cash flow that we expect Duyen Hai to generate over the next five years. We do
this by growing the value of VND10 billion by 3 percent per year.
Unit: Billion dong
Year 2014 2015 2016 2017 2018
FCFF 10.0 10.3 10.6 10.9 11.3
Terminal value
We assume that the free cash flow will eventually grow at a constant rate of 1% and cost of
capital at 8% from 2019 onwards. In this case, we use the formula for terminal value:
TV = [FCF0 (1 + g)] / (r – g)
TV 2018= [FCF2018(1 + g)] / (r – g) = (11.3  1.01) / (0.080 – 0.01) = VND 163 billion
Time
Sales
Start-up
Rapid
growth
Maturity
1980 1990 2010

27
Also, use discount rate 10%, we calculate present value:
PV2013= + + + + +
PV2013=
.
%
+
.
%
+
.
%
+
.
%
+
.
%
+
%
PV2013= 40 + 101.2 = VND 141.2 billion
Above, we excluded financial assets or liabilities (cash, short-term investment and short-term
debt) from the NWC calculation. We only calculate the value of assets serving core business
activities of Duyen Hai. Therefore, to calculate the value of equity, we have to add cash and
eliminate short-term debt to the present value:
Equity value2013 = VND 141.2 billion + VND 93.6 billion - VND 138.8 billion = VND 96
billion
Assessment: Equity value of Duyen Hai in FCFF model is much less than the book value because
of short-term debt is too large, despite the great present value and a large amount of cash.
The effects of changing assumptions
Our assumptions regarding a company's financial characteristics and future prospects generally
represent our best guess about what will happen. The result is what we might call the base case
estimate of company value. If we change the growth rate or discount rate, our estimate of the
companies' value will change. It is important to consider the effects of changes in assumptions in
a systematic way by conducting a sensitivity analysis. This allows us to examine how the value
estimate will change if our growth rate, discount rate, or other characteristics change. The choice
of which parameters to vary depends on the situation, but two important variables are the long-
term growth rate and the cost of capital.
One convenient way to present the results of a sensitivity analysis is to construct a table with the
different combinations on the growth rate and cost of capital. The hypothetical case shown in
following table presents an example. The value in each cell represents the enterprise value that
results from each combination of assumptions.

28
Sensitivity analysis of equity value
Unit: Billion dong
Discount
rate
Long-term growth rates
1 % 2 % 3 %
8 % 96 113.63 138.79
9 % 83 96.66 114.80
10% 73.25 83.93 97.66
From table, we see that we estimate equity value at VND 96 billion in our base case. In FCFF
model, we might also conclude that a reasonable range for the equity value is from VND 73.25
billion to VND 138.79 billion, depending on our assumptions regarding long-term growth and
the cost of capital.
3. Valuation with the cost of capital.
The company's cost of capital plays a very important role in the valuation process. In discounted
cash flow valuation, it determines the present value of future free cash flow. It can also provide
insight regarding risk and the extent to which a company has a sustainable competitive
advantage.
The intuition behind the Cost of Capital
Generally, we can calculate the return on a portfolio of n different assets as:
Portfolio return = (Weight in asset 1)  (Return on asset 1) + (Weight in asset 2)  (Return
on asset 2)... + (Weight in asset n)  (Return on asset n)
Where the weight in each asset are the fraction of our wealth invested in the asset. In essence, the
cost of capital can be viewed as the return on the assets. In essence, the cost of capital can
viewed as the return on a portfolio. It is the weight average return on the assets in the portfolio
which in why we refer its as the weighted average cost of capital WACC. In a corporate setting,
the portfolio is the mix of debt and equity securities, (also known as the capital structure) that a
company uses to finance its operations. The portfolio weights are computed as the fractions of
overall financing represented by each source of capital. We refer to these parameters as capital
structure weights in the cost capital calculation.
The reason that we use the WACC as the discount rate is our DCF valuation that it represents the
return that the company has to earn, on average, to satisfy its contributors of capital, its

29
bondholders and stockholders. The bondholders are the owners of the company's debt securities.
For a small or medium-sized company, the bondholder may simply be the bank. Larger
companies may have bank loans, commercial papers, or long-term bonds. The stockholders are
the owners of the company, since they have contributed equity capital. On an ongoing basis, the
company has to deliver returns to theses security holders. Bondholders have to be paid interest
and principal over time, and stockholders expect to receive an adequate return on their
investment. How do we determine the level of return that is adequate for the bondholders or
stockholders? Essentially, it depends on risk.
Required returns on debt
A company's cost of debt is the rate that it would have to pay if it went to the credit market today
to take out a new loan. We estimate this cost by analyzing the rates the company is paying on its
currents loans and considering other market conditions For a small to meium-sized company,
this process is fairly straightforward, as the company may have one or two outstanding banks
loans or revolving credit agreements. For larger companies, it get more involved, because they
may have several types of debt in place.
Consider a simpler case: a company with $ 30 million in total debt, $ 10 million in short-term
debt at 6 percent and $ 20 million of long-term debt at 9 percent.
Its cost of debt is 8 percent:
[($ 10 million / $ 30 million)  1.06] + [($ 20 million / $ 30 million)  1.09] = 0.08
When a company borrows, it agrees to pay the lender interest over the life of the loan and repays
the principal amount of the loan (face value) at maturity. For fixed-rate loan, the interest
payments are constant over the life of the loan; floating-rate loans have interest rats that move up
and down over the life of the loan, depending on the movement in the underlying index rate for
the rate. Loans are indexed to LIBOR (the London interbank offered rate) or to EURIBOR
(European interbank offered rate).
The yield to maturity on a bond is the discount rate that sets the present value of the bond's future
cash flows equal to its current market price. Intuitively, the yield represents an approximate
measure of the rate of return earned by bondholders. Riskier bonds carry higher yields. For a
given bond, the coupon payment don't change over its life, but the yield will change because of
two mains factors movements in interest rats in the economy, and changes in risk at the issuing
company. We can measure changes in interest rates from movements in Treasury bonds, and we
can assess change in risk at the company by reviewing its bond rating. Bonds rating, which are
published by agencies such as Standard & Poor's, Moody's or Fitch Ratings, measure the risk in
bonds and in the issuing company. When conditions at a company change for better or worse, the
bond rating should change to reflect the new level of risk. If we have enough information, we

30
can compute the yield to maturity directly; if not, we can estimate it using bond rating and other
data.
Mathematically, we compute the yield using the following formula:
Price = C (1 + y) -1
+ C (1 + y) -2
+ C (1 + y) -3
+ ... + (C + Principal) (1 + y) -T
Where Price is the current market price of the bond, C is the annual coupon payment, Principal is
the principal amount (face value) of the bond, and y is the yield of maturity. To calculate the
yield, we need to know the bond's market price. This presents a challenge, since most corporate
bonds are not publicly traded, and we do not observe the market price. As a result, we have to
estimate the yield using the company's bond rating and the yields on similarly rated bonds of
others companies.
From this discussion, you can see estimating the cost of debt can become a complex task.
Fortunately, in many cases, we can get a reasonable estimate rather easily. If the overall level of
interest rates has not changed much since a company has issued its debt and its financial health
has remained fairly stable, we can simply use the interest rate paid by the company as the cost of
debt. This rate is discussed in the notes to financial statements for a public company, and if there
a number of debt issues, each will have its own rate. We can take also estimate the cost of debt
on the balance sheet, but this method is reasonable only when the overall amount of debt has not
changed significantly over the year.
Required returns on equity
The cost of equity is the return required by the stockholders to compensate them for the risk in
their investment. We should note at the outset that the cost of equity is a market-based measure
and is not the same as the traditional "return of equity", a concept we discus in our analysis of
financial statements. The return on equity (ROE) is an accounting-based measure of performance
and is calculated by dividing net income by total stockholders' equity on the balance sheet. It has
very little to do with the return that stockholders require when they buy shares in a company.
What level of return do stockholders require when they invest in a software company, a bank, or
a closing retailer? To some extent, it depends on the individual. What we seek to estimate, as the
"cost of equity", is the return required by the average shareholder. There are a number of ways to
estimate this, but we focus on two common methods: the Capital Assets Pricing Model CAPM
and the build-up approach.
• Estimating the cost of equity using the Capital Asset Pricing Model CAPM
The Capital Asset Pricing Model (CAPM) is a model that was developed in academic research in
the 1960s. It likes risk and return by a measure called bêta via the following formula:
RE = RF + β [RM – RF]

31
where RE is the return in equity, RF is the risk-free interest rate in the economy, β is the
sensitivity of returns on stock to overall market returns, and RM is the expected return on the
market folio.
To use the CAPM to get the cost of equity, we need to estimate the inputs. The risk free interest
rate is the return provided by a riskless security, which is usually estimated by the current yield
on government bonds (for example the 10-years Treasury bonds with a yield o 3 percent). The
term [RM – RF] is the difference between the expected return on a portfolio known as the "market
portfolio" and the risk-free rate; the difference in returns it also known at the market risk
premium. Financial analysts often use the S&P 500 index as a representation of the overall
market, and use historical data over many years to estimate the market risk premium. For
example, we estimate the market risk premium to be 5 %. This means that on average, we expect
the annual return on stock to be 5 percent high than the returns Treasury bonds. If currently
Treasury bonds yielding 3 percent, we expect stocks to provide a return of 8 percent (dividends
and capital gains).
This brings us to beta, our measure of risk. Most investors think of risk as fluctuations in the
value of an investment. The concept of beta is more specific. It measures the extent to which
fluctuations in the returns on a stock are due to the co-movement of the stock with the overall
market. The returns on some stocks are highly sensitive to overall market conditions: these
stocks tend to have high betas. Other stocks, which are sometimes referred to as "defensive
investments", tend to move less strongly with overall market conditions, and have lower betas.
Theoretically, there is not upper limit or lower limit to the value of beta. Betas can be negative,
but negative betas are not commonly found.
• Estimating the cost of equity using the Build-Up Approach
As noted above, the CAPM is a theoretical model based on a number of assumptions. It has been
tested extensively over time and is used by some analysts, but certainly not by all. We now turn
our attention to an alternative method for estimating required return on a stock, the build-up
approach. This method shares one important characteristic with CAPM, that investors require
higher return when they face higher risk. It assumes that the expected return on a stock is equal
to the risk-free rate plus several risk premiums related to various characteristics of the company:
RE = RF + Market premium + Size premium + Industry premium + Liquidity premium
where the premiums represent compensation for additional sources of risk. For example, the size
premium is based on empirical observation that small stocks have historically tended to earn
higher returns than large stocks. An industry premium might represent additional compensation
for risk inherent in stocks in a particular industry, tech stocks for example. A liquidity premium

32
might be added to rewards investors for holding stocks that do not trade very often. Additional
premiums could be added to compensate for other reasons, such as foreign country risk.
To see how the build-up approach works, assume that we are investing in a relatively illiquid
stock of a small Internet retailer. We have determined that the premium for investing in small
stocks is 2 percent; the industry premium is 1.5 percent. With a 3 percent risk-free rate and a 5
percent market risk premium, our expected return using the build-up approach would be:
RE = 3 % + 5 % + 2 % + 1.5 % = 14.5 %
Doing synthesis and estimating the WACC
After we have estimated the costs and debt and equity, we are ready to estimate the weighted
average cost of capital. Again, think of the company as a portfolio of debt and equity, and the
WACC is the return on this portfolio. We calculate the WACC as the weighted average cost of
debt and equity, using the proportions of financing from each source as the capital structure
weights as follows:
WACC = [(D / V)  RD  (1 – T)] + [(E / V)  RE]
where V is the enterprise value, computed as the sum of the values of debt (D) and equity (E), D
/ V is the ratio of debt to enterprise value, E / V is the ratio of equity to enterprise value, RD is
the cost of debt, RE is the cost of equity, and T is the corporate tax rate.
We can notice that the cost of debts multiplied by (1 – T) in the above equation. We do this
because interest expense is tax deductible, from company's point of view. If the company can
borrow money at 7 percent and pays taxes at a rate of 40 percent, then after-tax cost of debt is
4.2 percent (calculated as 7 %  (1 – 0.40]).
• Some keys points related to the estimation of the WACC
Before we proceed with an example, let's remind ourselves of some key points related to the
estimation of the WACC:
1 – We should use the market values of debt and equity when computing the capital structure
weights. For most companies, the book value of debt is a reasonable approximation of market
value. We can obtain the market value of equity (known as the equity market capitalisation) for
public companies. If we are estimating the WACC for a private company, we can multiply the
book value equity by the price-to-book ratio of similar public companies to get an approximation
of the market up value of equity.
2 – The cost of debt is the rate that the company would have to pay on any new borrowing and is
based on current market conditions. We should consider all interest-bearing debt, both-short term
and long-term. For long-term debt, in theory, we should compute the yield to maturity on the
company's existing bonds. If the bonds are not publicly traded, we can estimate the yield using

33
the company's bond rating. For many financially healthy companies, the interest rate on their
loans is a reasonable approximation of the yield. Since interest expense is tax deductible, it is the
after-tax cost of debt that is relevant.
3 – The cost of equity is the return that the company's stockholders expect to earn on their
investment. It can be estimated with CAPM, the build-up approach, or other methods. Riskier
stocks have higher expected returns. For private companies, use the betas of similar public
companies in the CAPM, or use build-up approach, which does not require an estimate of beta.
Estimating a company's weighted average cost of capital is a critical step in the valuation
process. Since the WACC is the discount rate used in a DCF model, actions that a company can
take to decrease its WACC will increase its value. We can think of the WACC as an overall cost
of financing our company's operations, and lower WACC is associated with cheaper financing.
In addition, the cost of capital can be used internally by the company to establish performance
targets for managers. Companies that earn a return on invested capital greater than their WACC
are creating value; if ROIC is less than the WACC, the company is destroying value. Investors
should seek companies that are growing, with return on invested capital above the cost of capital,
as these companies are more likely to have sustainable competitive advantage over time.
Advantages of CAPM model
The CAPM has several advantages over other methods of calculating required return, explaining
why it has remained popular for more than 40 years:
 It considers only systematic risk, reflecting a reality in which most investors have
diversified portfolios from which unsystematic risk has been essentially eliminated.
 It generates a theoretically-derived relationship between required return and systematic
risk which has been subject to frequent empirical research and testing.
 It is generally seen as a much better method of calculating the cost of equity than the
dividend growth model (DGM) in that it explicitly takes into account a company’s level of
systematic risk relative to the stock market as a whole.
 It is clearly superior to the WACC in providing discount rates for use in investment
appraisal.
Disadvantages of CAPM model
The CAPM suffers from a number of disadvantages and limitations that should be noted in a
balanced discussion of this important theoretical model.
 Assigning values to CAPM variables

34
In order to use the CAPM, values need to be assigned to the risk-free rate of return, the return on
the market, or the equity risk premium (ERP), and the equity beta.
The yield on short-term Government debt, which is used as a substitute for the risk-free rate of
return, is not fixed but changes on a daily basis according to economic circumstances. A short-
term average value can be used in order to smooth out this volatility.
Finding a value for the ERP is more difficult. The return on a stock market is the sum of the
average capital gain and the average dividend yield. In the short term, a stock market can provide
a negative rather than a positive return if the effect of falling share prices outweighs the dividend
yield. It is therefore usual to use a long-term average value for the ERP, taken from empirical
research, but it has been found that the ERP is not stable over time. In the UK, an ERP value of
between 2% and 5% is currently seen as reasonable. However, uncertainty about the exact ERP
value introduces uncertainty into the calculated value for the required return.
Beta values are now calculated and published regularly for all stock exchange-listed companies.
The problem here is that uncertainty arises in the value of the expected return because the value
of beta is not constant, but changes over time.
 Using the CAPM in investment appraisal
Problems can arise when using the CAPM to calculate a project-specific discount rate. For
example, one common difficulty is finding suitable proxy betas, since proxy companies very
rarely undertake only one business activity. The proxy beta for a proposed investment project
must be disentangled from the company’s equity beta. One way to do this is to treat the equity
beta as an average of the betas of several different areas of proxy company activity, weighted by
the relative share of the proxy company market value arising from each activity. However,
information about relative shares of proxy company market value may be quite difficult to
obtain.
A similar difficulty is that the ungearing of proxy company betas uses capital structure
information that may not be readily available. Some companies have complex capital structures
with many different sources of finance. Other companies may have debt that is not traded, or use
complex sources of finance such as convertible bonds. The simplifying assumption that the beta
of debt is zero will also lead to inaccuracy in the calculated value of the project-specific discount
rate.
One disadvantage in using the CAPM in investment appraisal is that the assumption of a single-
period time horizon is at odds with the multi-period nature of investment appraisal. While
CAPM variables can be assumed constant in successive future periods, experience indicates that
this is not true in reality.

35
Advantages of WACC
The WACC calculation is useful in determining a strong estimate if not an exact cost of capital
leveraging. Ideally, the lower the WACC percent is the better for the company. The WACC
calculation can also serve as a metric to compare against a cost benchmark.
The weighted average cost of capital (WACC) is a metric used in finance to quantify percentage
distribution of cost for more than one non-equal sources of capital. The measurement helps
businesses ensure adequate cash-flow, assists with debt management decisions, and provides a
quantitative value with which to evaluate financial decisions. In essence, the average is
'weighted' based on the proportional amount of each type of capital. WACC can be calculated
using a tax deduction for after tax cost of capital and may include a cost of equity component
which itself can be calculated in more than one way.
The WACC calculation is useful in determining how a company is financed, and what that
capital costs. The WACC calculation serves as an indicator; benchmark and guide to financial
practitioners who is seeking to gain a more accurate understanding of corporate capital structure.
Disadvantages of WACC
Since market price of equity is not generally static, the true cost of capital varies that makes
investor’s expectations vary, so the cost of capital may not be an exact figure.
However, it is also important to note how the numbers in the WACC equation can be somewhat
misleading. For example, if a manager at Company A decides WACC is too high and
consequently pays off a loan using retained earnings, the loan portion of the WACC calculation
will decline assuming no other loans are taken. This could actually increase the cost of capital as
the remaining capital may be in a higher cost equity leveraging. Thus, WACC should not be
considered an operating cost but rather a measure of capital distribution and the cost associated
with that distribution of that funding.
Additionally, if corporate performance, market and economic conditions are favorable the
company's valuation may rise causing WACC to change for the better if shareholders
expectations do not adjust. If loan debt is variable rather than fixed, changes in the interest rate
of such debt can also cause fluctuations in WACC. Henceforth, being aware of the terms,
conditions, context and environment of capital costs is essential in interpreting the result of the
WACC calculation.
From Summary of Duyen Hai Balance sheet

36
Unit: Billion Dong
Years 2008 2009 2010 2011 2012 2013
Cash and cash
equivalents 85.3 67.1 124.6 48.2 60 93.6
Accounts receivable
short term 273.3 330.6 376.3 240.5 288.2 522.4
Inventories 132.4 142.8 170.5 225.9 313.7 386.8
Accounts payables 438.4 546.1 583.7 469 600.7 867.9
and liabilities 67.9 66.7 111.3 94.8 119 138.8
and liabilities 5.8 5.4 43.3 18.1 9.8 42.7
Debt 73.7 72.1 154.6 112.9 128.8 181.5
Equity 34.1 35.5 126.4 150.4 165.8 168
Free Risk Interest Rate
We take government bond yields of 5-year term (Source: http://tpcp.mof.gov.vn/)
Beta coefficient
We use data from 89 companies in construction and real estate field which are listed on Viet nam
stock market, source cafef.vn, the most famous site in Vietnam on financial and economic
information. See more detail in Appendix II. Then, we choose the company with the same
business characteristics and scale of capital, as table below:
No
Trading
symbol
capitalized P/E P/B Beta
(VND
billion)
(VND billion) (VND billion) (VND billion)
1 BT6 224.36 14.58 0.5 0.65
2 C47 152 7.01 0.92 0.27
3 CCI 143.83 8.41 0.74 0.41
5 CLG 160.74 5.17 0.78 0.97
6 CTI 159 21.14 0.9 0.44
7 DAG 177.38 6.61 0.97 0.62
8 DHA 137.06 17.64 0.45 1
9 DIC 150.06 12.62 0.73 1.58

37
Note: beta coefficient is calculated with the data of 100 trading session
From the data table above, we calculate the average of beta coefficient: β = 0.80
Market Risk Premium
Use the statistics of Market Risk Premium and Risk Free Rate Used for 51 Countries in
2013: A Survey with 6,237 Answers from IESE Business School, See Appendix III for
further information. We chose Thailand, the country located in Southeast Asia and the economic
environment is similar to Vietnam, then we calculate market risk premium of Vietnam.
Market Risk Premium
Thailand 7.60%
(Source: http://tpcp.mof.gov.vn/)
Because the liability to equity ratio of Duyên Hai is too much large (over 6 times in 2013),
which increases the level of risk so we should add about 4% to Vietnam market risk premium,
we estimate that risk premium of Duyen Hai is 12%.
10 HMC 201.6 9.51 0.63 0.57
13 L10 115.7 4.33 0.63 1.22
14 LBM 101.97 7.22 0.82 0.63
15 LM8 176.3 4.34 0.91 0.7
17 PXI 153 7.61 0.48 1.44
18 THG 107 7.47 0.69 0.67
20 UIC 102.4 3.81 0.58 0.9
Average of
comparables
9.16 0.72 0.80

38
Cost of equity:
Re Explanation
Cost of equity: Re =Rf +βx(RM – Rf) = 7.2% +0.8 x (12%) = 16.8%
Rf: Government bond yields of 5-year term 7.2%
β: Correlation of share with stock market 0.8
Market risk premium 12%
Cost of debt
The company is financed by 181.5 billion dong in debt with 10.7% interest rate from Military
Bank but the interest rates tend to decrease in the next years, so the cost of capital is expected at
8% in the long term (from 2019 onwards).
Tax
Corporate income tax is now reduced from 25% to 22% starting from 2014
Use the WACC formula:
WACC = [(D / V)  RD  (1 – T)] + [(E / V)  RE]
V= D + E
D = VND 181.5 billion
E = VND 168 billion
We have:
WACC Calculation
E/(D+E) =w(e) 48.1%
D/(D+E) =w(d) 51.9%
Cost of debt (Rd) 8.0%
Income tax (T) 22.0%
Cost of debt after tax= Rd*(1-T) 7.8%
Bêta coefficient 0.8
Market premium 12.0%
Cost of equity (Re) 16.8%
WACC= Re* w(e)+Rd*(1-T)*w(d) 11.3%
Valuate Duyen Hai with WACC
As previously, The FCFF of company is expected to grow at 3 % annually in the next five year
(2014-2018) and then at 1% in the long term (from 2019 onwards).
Free cash flow to the firm

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