DCF: long-term growth rate calculation

Calculate long-term growth rate

Step 1: Calculate Return on capital

  • NOPAT
  • Debt+equity

Return on capital = NOPAT/ (Debt+equity)

N.B.:

  1. Calculate NOPAT
Revenue
-Cost of goods sold
=Gross profit
-Selling, general & administration
=EBITDA
-Estimated depreciation
=EBIT
EBIT
-Taxes @ 35%
=NOPAT
+Estimated depreciation
=Cash flow from operations

 

  1. Debt are long-term obligations (listed on Balance sheet)

 

Step 2: Calculate Reinvestment rate

  • Change in net fixed assets
  • +Change in net working capital
  • =Net investment
  • NOPAT

 Reinvestment rate=Net investment/NOPAT

 

Step 3: Calculate long-term growth rate

g=Return on capital*reinvestment rate

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