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The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.9%) to estimate future growth. In the same way as with the 10-year ‘growth’ period, we discount future cash flows to today’s value, using a cost of equity of 7.9%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = AU$50m× (1 + 2.9%) ÷ (7.9%– 2.9%) = AU$1.1b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= AU$1.1b÷ ( 1 + 7.9%)¹⁰= AU$493m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is AU$863m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of AU$3.5, the company appears about fair value at a 1.1% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope – move a few degrees and end up in a different galaxy. Do keep this in mind.

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don’t agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company’s future capital requirements, so it does not give a full picture of a company’s potential performance. Given that we are looking at Tasmea as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we’ve used 7.9%, which is based on a levered beta of 1.136. Beta is a measure of a stock’s volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Check out our latest analysis for Tasmea

Strength

Weakness

Opportunity

Threat

Whilst important, the DCF calculation ideally won’t be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you’d apply different cases and assumptions and see how they would impact the company’s valuation. For example, changes in the company’s cost of equity or the risk free rate can significantly impact the valuation. For Tasmea, there are three relevant factors you should further examine:

1. Risks: For instance, we’ve identified 2 warning signs for Tasmea that you should be aware of.

2. Future Earnings: How does TEA’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the ASX every day. If you want to find the calculation for other stocks just search here.

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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

The bill could be a crushing burden on a U.S. EV industry that is already struggling with consumer fatigue, high interest rates, and tariffs on imported components. Although the final version is yet to be approved, the Senate has agreed to eliminate the $7,500 tax credit on electric vehicle purchases, while also ending support for residential solar and rolling back vehicle emissions regulations on Tesla’s gas-powered rivals.

These headwinds come at a time when Tesla’s overseas operations are struggling because of political backlash and new, low-cost rivals from China, which often enjoy open support from their government.

The next three years will be incredibly challenging for Tesla as the impacts of the act could potentially weaken the market for its products in the U.S. Musk’s political antics could make things worse by alienating some consumers and drawing potential political retaliation from President Donald Trump and his allies as it attempts to pioneer regulatorily-sensitive business ventures like artificial intelligence and self-driving cars.

Historically, it hasn’t been a good idea to bet against Musk because he usually proves his naysayers wrong. That said, these current challenges look daunting, even for him. And they could easily put pressure on Tesla’s sky-high valuation. Investors may want to stay away from the stock until more information becomes available.

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