Case Solution Digitcal Inc.

Digital Everywhere, Inc.

1. Discounted Cash Flow

In this first part of the assignment, the value of Digital Everywhere Inc. (DE Inc.) is calculated according to the discounted cash flow (DCF) method. The DCF-method is pre-financing, which means that they are independent of the capital structure of a firm. As the case describes, the following assumptions are made:

• No debt
• 1 million in cash to run the business
• 5% growth per year after 2003

or a modest growth of 2% per year

• 10-year government bond of 7% per year

Before using the DCF-method, it is necessary to calculate the increase in working capital, which can be defined as the difference between the current assets and the current liabilities of a firm.

The following formula shows how to calculate cash flows:

                CF = EBIT * (1-τ) + Depr - CapEx - ΔWK + Other

Where:

CF                 = Cash Flow                                                

EBIT                 = Earnings Before Interest and Taxes                

τ                = Corporate Tax Rate                        = 35 %.