In this workout, an analyst has prepared the following forecast for Alpha Inc. In FY1 to FY3. We're told to use the data and assumptions below to calculate the company's free cash flow in each year, and the company's enterprise value also calculates the company's implied share price using the balance sheet information. But here's the important bit. It says that Alpha Inc reports under US GAAP. I'm imagining that I'd like to compare my US GAAP company here to an IFRS company. So I'm going to have to make them comparable by adjusting my US GAAP numbers.

So let's scroll down. Let's get calculating our free cash flow. And although we've got things to do after that, such as terminal value, et cetera, this section is really where we're going to be doing our adjustments. My EBIT will have to be adjusted for lease interest because under IFRS, some of your rental expense is designated as interest and EBIT is before interest, so we're going to have to add back the interest. The second thing we'll have to change is in our D&A add back, we'll have to also add back depreciation on leases. And when we subtract CapEx, we'll also have to subtract lease CapEx. So let's get going on then. The EBIT, as reported to us, was 1,959.3, but we're going to add back the operating lease rental expense, but only the portion of that that we think is interest. And the portion of that that's interest is one third.

I'm going to lock onto that 33% And I've got EBIT of 2,214.8. To calculate NOPAT, you then take that multiply by 1 minus the tax rate.

Again, lock onto that.

We then add back D&A, and then we need to add back the portion of the lease rental expense that we think is depreciation. Now, one third of the operating lease rental expense was interest. That means the other two thirds is going to be depreciation. So I'm going to multiply that by 1 minus the depreciation, 33%, again, lock that. That gets the two thirds. We then subtract CapEx 536.7 and our lease CapEx, we're going to calculate lease CapEx says here's 2.8% of sales or revenue. So I'm going to multiply that by my revenue.

Make sure I lock that 2.8%.

Last off is the increase in working capital. It says here, we have had an increase in working capital, but we need to remember that that's going to have a negative impact on our cash flow. So I make that a negative.

Now I sum up notepads all the way down to get my free cash flow of 1260.5.

And if I now copy them to the right, I get all of my free cash. Three figures in years one, two, and three. We then move on to the terminal value. That's where I take the free cash flow. I need to multiply that by one plus the growth rates of 1.5%. And then I need to divide that by the discount rate minus the growth rate. So that's your classic terminal value calculation.

So there's that formula as well.

Now I need to present value the free cash flows. I'm going to use the NPV function to help me. The first thing I need in this is the discount rate of 9%, and then I need the numbers, I'm discounting, and that gets me to 3,343.6. Next, I need to discount the terminal value. So I'll take that, I'll divide that by 1 plus the discount rates all to the power of three years, getting me to 14.52, 3.1. And if I sum them up, that gets me to EV. Now, going from EV to equity, we need to make sure that we include the lease liability here as it currently stands in the company's accounts. So my equity calculation will start with EV. I'll then add on cash, but then I'll subtract out the debt lease liability and net pension liabilities or the pension deficits what it really is. So I've now got my equity value, I can then divide that by the company's shares outstanding. And now I've got an implied share price that I can compare with a company which was reporting under IFRS.