The Valuation Of PD Company Based On Free Cash Flow Model

PD Company, which was established in 2006, is one of the target investment projects of the venture capital firm which the author is working in. PD Company is classified in the medical equipment industry and it is an innovative and growing high-tech enterprise that specializes in research 、 product 、 sale of professional Extracorporeal Shock Wave Lithotripsy(ESWL)、focused ultrasound tumor therapy、urological diagnostic equipment and other medical instrument. Depending on the due diligence conducted by the investment manager of the venture capital firm, it is concluded that PD Company is highly worthy to be invested since it has vast potential for future development. Recently, this project is in the stage of negotiating the evaluation plan and designing the investment plan. How to appropriately evaluate the fair value of PD Company becomes the most urgent problem needed to be solved by the venture capital firm and PD Company. Standing at the investor’s point of view, this paper aims at providing the basis of negotiating the intrinsic value of a target investment project by means of adopting appropriate and scientific enterprise evaluation method.By investigating and comparing three common assessment methods, this paper provides the advantages, the disadvantages and the applicable conditions for each method accordingly. Since the medical equipment industry has its special background characteristics, and in consideration of the institutional investor’s concentration is the future profitability of the target investment project, this paper uses the free cash flow two-stage model as the assessment method to evaluate the intrinsic value of PD Company. The application process is obtained by carefully analyzing the free cash flow model. In the basis of attentively analyzing the business conditions and the financial statements of 2010-2014 of PD Company, this paper estimates the future free cash flow and other main financial indicators of PD Company. By introducing CAPM to assess the capital cost and discounting the future free cash flow, it is estimated that PD Company’s intrinsic value should be 450 million at 31 st December 2014, and its equity value should be 420 million. By employing the sensibility analysis on the estimation of PD Company’s intrinsic value, it is indicated that the intrinsic value of PD Company should be within 230-1,730 million, and its equity value should be within 200-1,700 million. By adopting the price-earnings ratio method PD Company’ equity value is 375 million.By conducting this research, the author is able to practice all the knowledge, which was obtained in MBA study period, in estimating the value of PD Company. This helps to integrate the theory and the practice together to solve enterprise’s practical problems. Meanwhile, by analyzing PD Company as a typical case, it is concluded that the free cash flow model is suitable to be adopted when estimating the value of enterprise.