Saito Solar - Discounted Cash Flow Valuation Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Saito Solar - Discounted Cash Flow Valuation Case Solution

Introduction

Saito Solar is a Japanese based privately owned photovoltaic (PV) solar panel manufacturing firm, founded in 2002 by Mr. Takuya Saito, as an active partner with two sleeping partners: Mr. Kenta Suzuki and Mr. Shinji Yoshida. The firm has been facing a steady decline in its sales due to low cost Chinese manufacturers in Japan. However, the recent new feed-in-tariff on solar energy imports from Japanese government provided a ray of hope for the Japanese solar energy manufacturers including Saito Solar.

The report provides an analysis of the valuation of the firm Saito Solar by the three partners where all partners agreed to the estimates of Saito after some clarifications. The report describes the significance of DCF valuation, followed by the analysis of valuation approach of each partner, a sensitivity analysis and conclusion.

Problem Statement

The three partners of Saito Solar are considering the buying offer form an investment bank that what price for the firm should be quoted. In this regards, the three partners have separate views about the firm’s valuation and has decided to go with the estimates of Saito with a Discounted Cash Flow valuation method at a discount rate of 10%.

Significance of DCF Valuation

Discounted cash flow valuation provides information on the value of a business. This information is provided in terms of the future cash flows, discounted at an appropriate rate that can be generated from a specific activity. It also provides an indication of the potential growth of a business. Because cash flows are based on a set amount of money paid in and received from a specific activity, it can provide an indication of what that activity might be worth in the future. DCF valuation provides a useful way to determine how well a business is doing. It can be quite difficult to determine the health of a business. However, this can be relatively easy if a business has an existing cash flow. Another advantage of discounted cash flow valuation is that it provides a method for determining the price of an investment.

Valuation of Saito Solar

Yoshida’s Valuation

According to Yoshida, the net worth of the firm is ¥5 billion that is calculated by multiplying the estimated cash flow per year of ¥250 million with number of years for these cash flows i.e. 20. This approach is simply unrealistic with no consideration of sales growth after tariffs, time value of money and the perpetual life of the firm.

Yoshida's Valuation
Net CF per year	250	20
Saito Solar Worth (250*20)	5000

Suzuki’s Valuation

Suzuki on the other hand includes the concept of discounted cash flows and considered that the cash flows received in 20 years will have low value in present than ¥5 billion. Suzuki also included the growth of cash flows from 3%-5% (assumed 4% for cash flow calculations) considering the growth in sales due to the new feed-in-tariff. The net worth of Saito Solar considering Suzuki’s approach is ¥2.922 billion. Although, the discounted cash flows concept and the sales growth estimates were realistic, but similar to Yoshida, Suzuki also avoided the concept of perpetual cash flows.

Saito’s Valuation

Saito on the other hand introduced the concept of discounted cash flow valuation approach with perpetual cash flows after 5 years at a perpetuity growth of 1%-3%. All partners agreed with the concept of Saito and asked Yamada to provide a range of firm’s value, using a sensitivity analysis.

Sensitivity Analysis

Sensitivity Analysis is conducted on the basis of the range of the perpetuity growth rate estimates provided by Saito i.e. 1%, 2% and 3%. The discount rate in each case is kept constant as 10% as this discount rate represents the required rate of return by the three partners on their invested capital and the required rate of return, WACC and discount rate are interchangeable terms. On the basis of the three cases of sensitivity analysis, three different values of the firm are given in Appendix 1.

Conclusion

On the basis of above analysis, it could be concluded that Discounted Cash Flow Valuation method with perpetual cash flows, is the most reliable valuation technique used by analyst helping the firms to estimate the current value of a firm on the basis of the present value of its future cash flows. Owners of Saito Solar can quote a price in the range from ¥6.333 billion to ¥7.696 billion....................

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Saito Solar – Discounted Cash Flow Valuation Harvard Case Solution & Analysis