Though we do not set any assumptions on how long the company we are valuating will be in existence, and, therefore, imply that its operations will continue forever, the calculation loop cannot be indefinite. Thus, merely for practicality considerations, we put some reasonable time horizon (say, 50 years) for our forecast.

The time horizon is also the number of times we go through the calculation algorithms that forecasts key financial data, with each passage through the loop corresponding to a separate year in the future.

Below is a brief description of each step of the calculation and the appropriate formulae.

**Revenue growth rate****Revenue**Revenue = Previous year revenue x (1+ Revenue growth rate)

REVENUE = REVENUEprev x (1 + REVGR)**Variable costs**Variable costs = Revenue x Variable cost factor+ Goodwill / Years goodwill amortizes

Note: the second addend exists only in years when Goodwill is greater than zero (i.e. when it is not fully amortized).

VARCOSTS = REVENUE x VARCOSTF + GOODWILL / GWAMORT**Production assets or base (average for the year)**Production assets = Revenue x Production assets to revenue

PRASSETS= REVENUE x PRASSREV**New CAPEX**Here we calculate the amount of capital expenditures needed to expand the production base to the level commeasurable with the current level of revenue. We assume that all new capital expenditures are made at the very beginning of the year and, therefore, the benefits of this new CAPEX also fully accrue in the current year. Definitely, this is an oversimplification, but the one that greatly reduces complexity of the model.

New CAPEX = Production assets - Previous year production assets

NEWCAPEX = PRASSETS - PRASSETSprev**Maintenance CAPEX**Maintenance CAPEX, as it is used here, is different from maintenance expenses. Rather, in accounting terms it could be described as the current-year depreciation expense (estimated here on the straight line basis) on the previous-year production assets. We consciously used the word ‘maintenance’ to describe these capital expenditures, as, in essence, this is the CAPEX that is needed to keep existing production assets at their current production capacity.

Maintenance CAPEX = Previous year production assets / Depreciationlife of production assets

MAINTCAPEX = PRASSETSprev / DLIFE**Depreciation expense of new CAPEX**As mentioned above, we assume that all new capital expenditures are made at the very beginning of the current year. Therefore, we must also account for depreciation of the new CAPEX already in the current year. Depreciation is calculated on the straight line basis.

Depreciation expense on new CAPEX = New CAPEX / Depreciation life of production assets

DEPRNEWC = NEWCAPEX / DLIFE**Total depreciation**Total depreciation = Depreciation expense on new CAPEX + Maintenance CAPEX + Goodwill / Years goodwill amortizes

Note: the third addend exists only in years when Goodwill is greater than zero (i.e. when it is not fully amortized).

DEPREC = DEPRNEWC + MAINTCAPEX + GOODWILL / GWAMORT**Fixed operating expenses**Fixed operating expenses = Previous year fixed operating expenses x (1+Inflation rate)

FIXCOSTS = FIXCOSTSprev x (1 + INFLATION)**EBIT(Operating Income)**EBIT = Revenue - Variable costs - Fixed operating expenses

EBIT = REVENUE - VARCOSTS - FIXCOSTS**EBITDA**EBITDA = EBIT + Total depreciation

EBITDA = EBIT + DEPREC**Interest expense (on net debt)**Interest expense = Previous year total net debt x Interest rate on debt

INTCOSTS = NETDEBTprev x INTRATE**Earnings before tax**Earnings before tax = EBIT - Interest expense

EBT = EBIT - INTCOSTS**Tax expense**Tax expense = Earnings before tax x Corporate tax rate

Note: only if Earnings before tax are positive

TAXES = EBT x TAXRATE**Net income**Net income = Earnings before tax - Tax expense

NETINCOME = EBT - TAXES**Funds from operations (FFO)**Funds from operations = Net income + Total depreciation

FFO = NETINCOME + DEPREC**Working capital**Working capital = Revenue x Working capital to revenue

WC = REVENUE x WCREV**Change in working capital**Change in working capital = Working capital - Previous year working capital

WCCHG = NFWC - NFWCprev**Cash from operations (CFO)**Cash from operations = Funds from operations - Change in working capital

CFO = FFO - WCCHG**Free cash flow (FCF)**Free cash flow = Cash from operations - New CAPEX - Maintenance CAPEX

FCF = CFO - NEWCAPEX - MAINTCAPEX**Adjusted total assets**Adjusted total assets = Revenue /Production assets to revenue

ADJASSETS = REVENUE / PRASSREV**Equity**Equity = Adjusted assets * Adjusted equity ratio

EQUITY = ADJASSETS * EQRATIO**Change in equity**Change in equity = Equity - Previousyear equity

EQUITYCHG = EQUITY - EQUITYprev**Adjusted total liabilities**Adjusted total liabilities = Adjusted total assets -Equity

ADJLIABIL = ADJASSETS - EQUITY**Change in liabilities**Change in liabilities = Adjusted total liabilities - Previous year adjusted total liabilities

LIABILCHG = ADJLIABIL - ADJLIABILprev**Issuance of new debt**Issuance of new debt = Change in liabilities

NEWDEBT = LIABILCHG**Total cash flow**Total cash flow = Free cash flow + Issuance of new debt

TOTALCF = FCF + NEWDEBT**Cash flow adjustment**(for real cost of stock options, for example)

This is the entry for any cash flow adjustments, such as for the real cost of stock option compensation plan used by the company, for example.Cash flow adjustment = Revenue x Cash flow adjustment to revenue

CFADJ = REVENUE x CFADJREV**Adjusted total cash flow**Adjusted total cash flow = Total cash flow + Cash flow adjustment

ADJTOTALCF = TOTALCF + CFADJ**Cash for distribution 1**

Before cash could be distributed to shareholders, it is used, if needed, for equity increase - see the change in equity calculation above. Conversely, if the change in equity is negative, such change could be distributed to shareholders, too.

Cash for distribution 1 = Adjusted total cash flow - Change in equity

CFD1 = ADJTOTALCF - EQUITYCHG**Issuance of new equity**If Cash for distribution 1 calculated above is negative, then the company needs to issue new equity (i.e. sell its shares to shareholders).

If CFD1 is negative:

Issuance of new equity= -CFD1

NEWEQUITY = -CFD1

If CFD1 is non-negative:

Issuance of new equity = 0

NEWEQUITY = 0**Cash for distribution 2**Cash for distribution 2 = Cash for distribution 1 - Issuance of new equity

CFD2 = CFD1 - NEWEQUITY**Proportional claim of current shareholders on cash flows**If new equity is issued (i.e. if new shares are sold by the company to investors), the stake of the current shareholders on the company’s assets and cash flows is diluted (assuming that they do not purchase newly-issued shares).

Proportional claim of current shareholders on cash flows = Previous year proportional claim of current shareholders on cash flows x (Equity - Issuance of new equity) / Equity

PORTION = PORTIONprev x (EQUITY - NEWEQUITY) / EQUITY**Cash for distribution 3**Cash for distribution 3= Cash for distribution 2 x Proportional claim of current shareholders on cash flows

CFD3 = CFD2 x PORTION**Present value (PV) of cash for distribution**PV of cash for distribution = Cash for distribution 3/(1+Discount rate) ^ Year

PVCFD = CFD3 / (1+ DR) ^ Year**Next year’s discount rate**Next year’s discount rate = Discount rate x Discount rate multiplier

DRnext = DR x DRMULT

The calculation loop starts with forecasting revenue growth rate for a particular year. For the first forecasted year following the base year, it is set to be equal to its input value. For all subsequent years it is calculated using the following formula:

Revenue growth rate = Terminal revenue growth rate +(Revenue growth rate at previous year -Terminal revenue growth rate) x Revenue decline factor

REVGR = TERMREVGR + (REVGRprev - TERMREVGR) x REVDECL

The intrinsic value of the company is calculated by summing up the present values of the cash flows available for distribution in each of the future years that were estimated in the calculation loop. We impose a restriction on the lower magnitude of the intrinsic value: it cannot be less than the company’s Tangible net worth.

By dividing the company’s intrinsic value by the number of outstanding shares, we find the intrinsic value per share. The latter is compared with the current market share price to estimate the company’s stock upside or downside potential.