Instacart just had its Initial Public Offering $($IPO$)$ with the shares priced at $$30$ to IPO investors. When it

opened for trading by the public, it jumped to $$42$ before closing at $$33\mathrm{.}70.$ Since then, the market has

valued it in the $$24$$$27$ per share range. Valuing a company is basically a big capital budgeting exercise.

Instead of forecasting the cash flows from a single project, you forecast the cash flows for the whole

company. Instead of calculating the NPV of a new product, you calculate the NPV of the cash flows of

the whole company. One complicating factor is that while a product will come to an end, in principle a

company will not $($we hope$).$ So$,$ we have to make an assumption at some point about how the cash

flows of the company grow in the long$$run $($more on this below$).$ The typical approach to valuing a

company is to start by specifically forecasting the cash flows for the next $5$ to $10$ years and then make a

simplifying assumption beyond that.

$1.$ Start with Instacart.xlsx from Canvas.

$2.$ The sheet lists some assumptions about the Year$$Over$$Year $($YOY$)$ growth of revenues and

certain expenses for $20242033.$ Most analysts expect Instacart to get its costs under control to

approach mature, steady state growth by the end of the decade. Use the base case assumptions

to build a forecast of net income $($earnings$)$ and then free cash flows of Instacart for the years

$2024$ to $2033.$ Specifically, start with forecasting revenues for each year and then expenses, etc.

like we did in capital budgeting until you eventually get to Free Cash Flows. Assume a tax rate of

$21\%.$ To simplify the analysis, ignore tax$$loss carryforwards and assume that any year with

negative taxable income has a tax of zero.

$3.$ Beyond $2033,$ you will need to make an assumption to handle the mature part of Instacart$$s

lifecycle.

a$.$ Taking the free cash flows you forecast for $2033,$ assume that they will grow by $3\%$ to

$2034$ FCF $($and will continue growing at $3\%$ thereafter$).$

b$.$ Assume that the opportunity cost of capital for Instacart is $13\%.$ You can treat all cash

flows starting in $2034$ and continuing onward as a growing perpetuity with a growth rate

of $3\%.$ By doing this, you will have what is called a $$terminal value$$ or $$continuation

value$$ for Instacart as of the end of $2033($one year before the first cash flow in the

growing perpetuity$).$

$4.$ To avoid timing complexities, we will assume that you are valuing Instacart as of the end of

$2023/$beginning of $2024($time $$zero$,$ or $$now$),$ and that cash flows occur in $12$month

intervals, so $2024$ refers to exactly one year from time zero. Due to a bunch of one$$time costs,

Instacart is expected to have a FCF of $$$$1\mathrm{.}9$ billion in $2023,$ so count that as your year zero FCF$.$

Discount all cash flows back to the time zero $($end of $2023)$ using a $13\%$ cost of capital and the

$$NPV$$ function in Excel. To this present value, add Instacart$$s $$2\mathrm{.}8$ billion in cash. This is the

total value of Instacart, which would be the sum of the debt and equity values. Instacart does

not have debt, so that means it is the total equity value.

$5.$ To calculate the price per $($equity$)$ share, you must divide the total equity value by the number

of shares outstanding. Instacart has $335$ million shares outstanding.

Autumn $2023$ FIN $350$ Valuation Case Due Wednesday, Nov $29$ th

$6.$ Next, perform some sensitivity analysis using the Upside and Downside scenarios to compute

Upside and Downside stock prices.

a$.$ Use the High Revenue Growth assumption to compute a new stock price estimate if

revenues grow faster at first.

b$.$ Reset your revenue growth assumptions to the Base Case and check the sensitivity of

the valuation to the assumptions about Instacart$$s ability to control costs. The Base Case

assumes that expenses as a percent of revenue will pretty quickly get down to and

stabilize at $67\%,$ but this could be optimistic, especially if competition requires more

advertising. For the Downside scenario, apply the High Costs assumptions to see what

the impact would be of slower cost control.

$7.$ What would be needed for your DCF model to produce a price of $$42$ per share $($the high price

on the first day of trading$)?$ Specifically, by changing your revenue growth or cost assumptions,

find a set of assumptions that would produce a stock price of approximately $$42.$ You should

comment about the reasonableness of these assumptions in your writeup. $[$NOTE: There are

many combinations of assumptions that will work$$there is no $$right$$ answer here.$]$

$8.$ An alternative way to value a stock is by use of multiples. $[$NOTE: There is no reason to expect

the multiples$$based valuation to agree with your DCF$$based valuation because different

assumptions underly the two methods.$]$

a$.$ Multiples valuation should be forward looking, so start with Instacart$$s Base Case $2024$

projected Earnings Before Interest, Taxes, Depreciation and Amortization $($EBITDA$,$ a

standard cash flow measure$)$ from your DCF and compute its total Enterprise Value convert to equity by adding in the cash and calculate the share price fom there