Diageo

Dear Students,

In addition to my previous emais, I now supply you with an email consisting of some concluding remarks. Specifically, in this email, I will explain to you:

(a) how to arrive at the intrinsic value (some of the supervisors also refer to this as the target price) using the DCF model, and

(b) how to arrive at the investment decision (i.e. BUY or SELL)

(a) How to arrive at the intrinsic value (some of the supervisors also refer to this as the target price) using the DCF model

Before I explain to you how to calculate the intrinsic value, please note that this email is a build-up of my previous emails over the past weeks. Hence, to be able to apply this final stage, it is essential that you have followed my previous emails (received sometime during the past weeks) and calculated the (a) future free cash flows (between the years 2021 - year X) and (b) the terminal value (in year X).

After you successfully compute the future free cash flows (until year X) AND the terminal value, as mentioned in a previous email of mine, it is essential to discount these 'future free cash flows' AND the terminal value using the WACC (this is the discount rate).

Discounting the future free cash flows and the terminal value using the WACC will give you the so-called enterprise value.​ To arrive at the intrinsic value (target value), you need to FIRSTLY compute the equity value:

Equity Value = Enterprise Value - Net Debt + Financial Investment - Minority Interest

where Net Debt = Debt (found in the non-current liabilities section in the "balance sheet") - Cash (found in the current assets section in the "balance sheet")

Financial investment (sometimes referred to as just "investment") --> this can be found in the "non-current assets" section in the "balance sheet")

Minority Interest (also known as "non-controlling interest") --> this can be found in the "non-current liabilities" section in the "balance sheet"

Note 1: Sometimes the balance sheet is referred to as the "statement of financial position" --> some companies use the one term (or the other), so please keep this in mind when looking for this in the annual report

Note 2: Some companies have NEITHER financial investment NOR minority interest; in this case, you will find the equity value by merely taking the Enterprise value and deduct from this the Net debt (as shown above). Or, sometimes, some companies may have just one of the two (i.e. for instance, they may have just financial investment OR minority interest). Whatever the case, please have a careful look in the balance sheet and make sure to see the items that it has and, accordingly, trace those items in the formula above.

Then, after you arrive at the equity value​​,​ it is essential to arrive at the intrinsic value (remember, as said earlier, some supervisors refer to this item as the "target value"). To find the intrinsic value:

Intrinsic Value = Equity value (from above) / number of shares outstanding

This is the end of the DCF model (whose purpose is to find the intrinsic value of the company that you analyse).

(b) how to arrive at the investment decision (i.e. BUY or SELL)

After you calculate the intrinsic value (above), it is essential to draw your conclusion in your project (remember this was the aim of the project from the beginning; that is, to conclude on whether the investors should BUY or SELL the stock).

To be able to make this conclusion, it is essential to compare the intrinsic value (found above) and compare this intrinsic value to the share (market) price on June 30th 2021. Specifically:

IF the intrinsic value > market price on June 30th 2021 --> it is recommended that the investors BUY the stock

IF the intrinsic value < market price on June 30th 2021 --> it is recommended that the investors SELL the stock

Note: The market price on June 30th 2021 is something that you can easily find online (assuming this is the date agreed with your supervisor).

OVERALL: This conclusion puts an end to the project.

Please use all of the emails that I have sent to you, and these will direct you effectively towards the completion of the project.