MM NOPAT 90.91 100.0 110 121 133 146 161 177 195 214 236 259 285 314 345 380 Investment in future 50 50 55 59 61 67 73 81 89 97 107 118 130 143 157 173 190 259 Free Cash Flow 50 50 55 55 60 60 67 73 81 89 97 107 118 130 143 157 173 190 130 PV of FCF 47 D Cumulative PV of FCF 47 77 48 95 145 649 50 51 53 55 56 58 196 249 304 360 418 00 00 60 62 64 99 66 68 70 72 130 478 540 603 669 736 806 878 64 Residual Value 1,642 1,806 1,987 PV of Residual Value 1,539 1,586 1,635 2,185 1,686 2,404 1,738 2,644 2,909 3,199 3,519 3,871 4,258 4,684 1,792 1,847 1,904 1,963 2,024 2,087 2,151 5,153 2,218 2,286 2,357 5,668 6,235 603 els cash Debt Corporate Value 1,586 1,681 1,780 1,882 1,987 2,096 2,207 2,322 2,441 2,563 2,690 2,820 4.258 2,954 3,092 3,234 2.087 2.690 [Shareholder value 1,586 1,681 1,780 1,882 1,987 Shares outstanding 2,096 2,207 2,322 1 21 2,441 2,563 2,690 2,820 2,954 3,092 3,234 1 .690 Shareholder value per share $1,586 $1,681 $1,780 $1,882 $1,987 $2,096 $2,207 $2,322 $2,441 $2,563 $2,690 $2,820 $2,954 $3,092 $3,234 Year 2 3 5 6 8 6 10 11 12 13 14 15 2,69 The Math We start by calibrating our discounted cash flow model with inputs that yield a P/E multiple in the low 30s. Here are the definitions and the initial assumptions: • We assume net operating profit after tax (NOPAT) will grow 10 percent per annum. NOPAT represents the cash profits a company would earn if it had no financial leverage. • We assume a return on incremental invested capital (ROIIC) of 20 percent. ROIIC is defined as the change in NOPAT from this year to next year divided by this year's investment. For example, if NOPAT grows by $10 next year and the company invests $50 this year, the ROIIC is 20 percent (10/50). Note that it does not matter if the investment is expensed or capitalized, save for some effect on taxes. • We assume the cost of equity capital to be 6.7 percent, which was Aswath Damodaran's estimate as of February 1, 2020. The cost of equity measures the return an investor expects to earn given the assumed risk. As such, the figure is the sum of the risk-free rate of 1.5 percent and an estimated equity risk premium of 5.2 percent. We assume the company is financed solely with equity for simplicity. Adding debt makes the calculations slightly more cumbersome but does not change the story. • The model values explicit cash flows for 15 years after which it uses a perpetuity to estimate the residual value. Specifically, the model takes NOPAT in year 16, which reflects the benefit of the investment made in year 15, and capitalizes it by the cost of equity. That figure is then discounted to a present value. ©2024 Morgan Stanley. All rights reserved. 3794236 Exp. 8/31/2025 5 Morgan Stanley | INVESTMENT MANAGEMENT C COUNTERPOINT GLOBAL Here's a summary of the inputs and the output: NOPAT growth: 10% ROIIC: 20% Cost of capital: 6.7% P/E: 32.3