Titan Cement is a Greek company with a well established reputation for efficiency

and profitability. To value the company, we used a firm valuation model and the
following assumptions.
In 2014, the firm reported 231.8 million euros in operating income and an effective
tax rate of 25.47%. Scaled to the book value in 2013, this yields an after tax return
on capital of 19.5%
In 2014, Titan cement reported net capital expenditures of 49 million euros and an
increase in noncash working capital of 52 million euros. The resulting reinvestment
rate is 58.5%
Reinvestment Rate

= (Net capex + Change in WC)/(EBIT*(1-t))

= (49+52)/(231.8*(1-.2547)
= 58.5%

The reinvestment rate has been volatile over the last five years, and the average
reinvestment rate over that period is 28.54%. We assume that Titan will maintain this
average reinvestment rate for the next five years, in conjunction with the return on
capital in the most recent year of 19.25%. The expected growth rate in operating
income is 5.49%.
Expected growth rate

= Reinvestment rate * Return on capital

= .2854*19.25%
= 5.49%

Using a beta of .93 for Titan Cement, a euro risk free rate of 3.41%, and a risk
premium of 4.46% for Greece, we estimate a cost of equity of 7.56%
Cost of equity

= Risk free rate + Beta * Risk premium

= 3.41% + .93*4.46%
= 7.56%

The pre-tax cost of debt for Titan cement for the next five years is 4.17%, based on a
synthetic bond rating of AA and a default spread for Greece of .26%. To compute the
cost of debt for Titan, we added an estimated default spread of .5% for Titan and the
default spread of Greece as a country of .26% to the risk free rate of 3.41%.
Cost of capital

= Cost of equity*(E/D+E) + After tax cost of debt*(D/D+E)

= 7.56%(.824) + 4.17%(1-.2547)(.176)
= 6.78%

After year 5, we assume that the beta for Titan cement will approach 1, that the
country risk premium for Greece will become zero, and that the tax rate will approach
the European Union marginal tax rate of 33%.

Cost of equity

= 3.41% + 1(4%)

= 7.41%

Cost of debt (After tax)

= 3.91% (1-.33)

= 2.61%

Cost of capital

= 7.41% + 2.61% (.176)

= 6.57%

After year 5, we also assume that the growth rate in operating income will drop to
3.41% (the risk free rate) and that the excess returns are predicted to approach zero.
The return on capital will therefore be equal to the cost of capital of 6.57%, and the
reinvestment rate in stable growth is 51.93%.
Reinvestment rate in stable growth firm = g/ROC = 3.41%/6.57% = 51.93%
To estimate the value of Titan cement, we begin by estimating the free cash flows to
the firm each year for the high growth phase, using a growth rate of 5.49% and a
reinvestment rate of 28.54%
Current
Reinvestment
Rate
EBIT * (1-T)
- (Capex Dep)
- (Change in
WC)
FCFF
Cost of capital
Cumulated CoC
PV

28.54%

28.54%

28.54%

28.54%

28.54%

172.76
49.2

182.25
40.54

192.26
42.77

202.82
45.11

213.96
47.59

225.72
50.21

51.8

11.47

12.11

12.77

13.47

14.21

71.6

130.24
6.78%
1.0678
121.97

137.9
6.78%
1.140
120.51

144.94
6.78%
1.217
119.06

152.9
6.78%
1.299
117.63

161.3
6.78%
1.388
116.21

To estimate the terminal value, we estimate the cash flows to the firm in yaer 6 and
apply the stable period cost of capital and growth rate to it.
Terminal cost of capital = 6.57%
Cash flow one year after terminal year

= EBIT*(1-t)*(1-Reinvestment rate)
= 100.88 million euros

Terminal Value

= 100.88/(.0657-.0341)

= 3195 m euros

Discounting the terminal value back to present at todays cost of capital plus adding
explicit cash flow values, enterprise value comes out to
Value of operating assets

= 2897.42

+ Cash and marketable securities

= 76.80

- Debt and non-operating assets

= 414.25

- Minority interests

= 45.90

Value of equity in common stock

= 2514.07

Value of equity per share

= 32.84 euros per share

The stock was trading at 25.34 euros per share making it undervalued by roughly
25%.