PART 1. Estimate the value of AEM and its equity value.
Step 1. Estimate free cash flow
In DCF model, the first step is to forecast the cash flows. Given the seven-year projections of AME’s free cash flow shown in Exhibit 9, related free cash flows are organized in table 1. Line 4 through 13 show a simplified income statement for AEM. Depreciation is a noncash expense. Includes depreciation is because it may impact on taxable amount. Line 14 adds depreciation back to generate the free cash flow for AEM.
As figures are calculated through Excel, there might be rounding errors. In addition, all the entries in the table are expressed in US dollars, which considers the effect of foreign exchange fluctuations on the transactions
Step 2. Determine discount rate.
The following step is to determine an appropriate discount rate to generate the net present value of the entity. As Nickols and Chelonis agree with that “the estimate of the weighted average cost of capital provided in the report were in line with their expectation” (,pp.11), the amount of WACC provided in Exhibit 10 can be considered convincible to use as the discount rate in this DCF analysis (line 16). Target weight used to forecast WACC is based on AEM’s historical average. As the historical target weight applied by AEM is different from that used by its competitors, A-G Financial Consulting considered it reasonable to believe that AEM management would continue to use this proportion to raise capital (debt/equity ratio equals 1). Tax rate (line 10) derived from Exhibit 10 is also a variable affecting WACC, since debt will “vary with the changing marginal tax rate” (pp.23). As the tax rate remains the same in year 2005-2008, WACC will also stay constant since 2005.
Step 3. Calculate the terminal value
Based on the going concern assumption, cash flow of an entity is infinity. In this case, terminal