What are the fundamental principles of the DCF valuation of Exhibit 5?

What do you think is a relevant range of values for Ferraris DCF valuation?

Valuing Ferrari There are two basic valuation methodologies applicable to Ferrari: discounted cash flow (DCF) and valuation with comparables. DCF Valuation A baseline discounted cash flow (DCF) valuation of Ferrari is presented in Exhibit 5. Based on the income items provided by Ferrari and previously presented in Exhibit 2, the DCF valuation is driven by top-line growth. The analysis is based on a 10-year outlook, assuming 2015 as year 0 . Volume growth. Ferrari's leadership team assured investors of slow volume growth, explicitly committing to just under 9,000 units by 2019 . That translated to an annual growth rate of 4.4% beginning with the 2015 volume of 7,500 . Price growth. Ferrari has provided some insight into the potential of automobile price growth, repeatedly noting it was "committed to raising the average price point" of its products. Assuming that the scarcity discipline towards volume growth is maintained, and attention is focused on maintaining a four-month waiting period for orders, the baseline analysis assumes that price may grow 2% per year. It is possible, however, that more aggressive annual price increases of 3% to 4% may be achievable. Other revenues. Ferrari's income from the sale of engines to Maserati, rental incomes, and sponsorship associated with the brand are all expected to grow a moderate 3% per year. Formula 1 income, a small component that leadership believes is critical to the brand, is only expected to grow 1% annually. Cost of sales changes and gross margin. Ferrari purchases from a small set of suppliers working under relatively long contracts. It employed 2,858 workers, and turnover was low. Labor costs and costs of sales were expected to grow at 2.1% per annum in the baseline analysis. SG\&A and R\&D expenses. This was in the eyes of many the second most critical valuation component behind that of volume sales. If SG\&A and R\&D expenses both only grew at 2.0% and 2.5%, respectively, per annum, reflecting what many analysts believed to be the company's cost discipline and strategy moving forward, Ferrari's operating margin would indeed grow considerably over the 10 -year forecast period. Depreciation and capex. In its prospectus, Ferrari noted that there would likely be little additional investment in plant and equipment necessary for expanding volume production in the coming years. The company considered itself inherently agile, production increases were nominal in size, and sufficient capacity existed. At the same time, historical financial statements indicated continuing capital investments in both PP\&E and intangible assets (intellectual property and related engineering knowledge). Ferrari included depreciation in its line item for research and development on its income statement (Appendix 1). Depreciation expenses had totaled 120 million in 2013,126 million in 2014 , and were expected to total 130 million in 2015 . The DCF baseline analysis assumed no growth from 2015 levels in line with management's direction. However, many analysts believed capital investment has to grow, at least in line with direct costs, if Ferrari is to maintain its technological edge. Capex and depreciation were assumed equal in size in the valuation analysis. Net working capital. Ferrari's net working capital (NWC) was unusually long in duration due to its dealer nerwork financing program. Ferrari provided extremely low-cost loans to its dealerships (independently owned businesses) to aid in their purchase of the automobiles for resale. The loans were typically secured by the titles to the cars or other collateral. Total receivables, trade receivables for the cars themselves, and receivables from financing activities, loans to the dealerships, had averaged 180 days of sales in 2014. Ferrari's hand-crafted manufacturing