Saito Solar-Discounted Cash Flow Valuation

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- Strategically, do you think Mr. Saito and his partners should sell the firm at this time?

To make the decision whether to sell the firm now or not, several factors are needed to be considered. Among these issues, having a fair and objective valuation of the firm can be the most important thing to do. To follow the professor’s instructions, we build the DCF valuation models both based on Suzuki’s estimate and the free cash flow forecast provided in Appendix 3. In the following paragraphs, we will talk about and compare the three valuations’ results mentioned in the case, and find out how we should do the decision making.

Yoshida’s valuation is that the firm was generating about 250 million of net cash flows per year, which will continue for the next 20 years. So, he came out with 5 billion by simply multiplying 250 million by 20. However, it is not good because he didn’t consider the fact that future cash flows would be discounted to the today’s value.

Table 4

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Based on Mr. Suzuki’s estimate of 3 - 5% growth rate of Saito Solar’s free cash flows over the next 20 years, we build the DCF valuation model and get the above result (business value equals to 7166.11 million). We can find that the business value is even bigger than the result of Yoshida’s valuation, and the reason is that there is a 3 - 5% growth rate here, which is more reasonable than the previous valuation.

Table 5

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In the last valuation model, we assume a range of 9 – 11% WACC and 1 – 3% terminal value growth rate, and find out the above results. We can see that the business will fluctuate in the range from 5668.10 million to 9021.01 million. This range can provide us more objective information than a sole business generated by the last model.

Based on the background information provided by the case, we can find that the solar energy can be highly demanded in the long term given the durable and cost-effective solar panels, which means that the solar energy industry can be promising in the future. Therefore, we think solar energy industry has a great development in the future. The actual sales growth rate maybe even higher than the estimated growth rate in the case, so the actual business value of the company is higher than the estimated business value. It has more benefits to keep the company unless the buyer offers higher price. Consequently, we suggest that Mr. Saito should not sell the company at this time.