Lazard estimated SolarCity's enterprise value as the present value of net cash flow for 2016 - 2020 plus a terminal value, assuming discount rate WACC of 10.5% and a perpetuity growth rate of 1.5%. SolarCity's equity value was then estimated by subtracting from enterprise value the face value of net debt (debt minus cash), $3.4 billion. SolarCity had 98.3 million shares outstanding. SolarCity management projections of net cash flow ($millions) in financially constrained case: FY 2016 FY2017 FY2018 FY 2019 161 290 454 499 FY2020 635 What is the stock price in the financially constrained case? • For simplicity, assume the valuation date is the beginning of fiscal year 2016 and all cash flows will be realized at the end of the corresponding fiscal year.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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