Saito Solar Case

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Saito Solar Case

Saito Solar Case

  1. Explain what is going on in the case (short description a paragraph will suffice) Make sure that you identify the main issues. 4 points

This case is about Saito Solar’s owner, Takuya Saito, getting approached by an investment bank to sell his company. The case also talks about the recent boom in solar energy and the new feed-in tariff imposed by the Japanese Government, which has caused a surge in solar production. Mr. Saito has 2 silent partners and the case is about the discussion of valuation of their company. The 2 silent partners disagree on the valuation of the company but all 3 partners are intrigued by the potential buyer. The company’s finance manager prepared the 5-year cash flow projections and all 3 partners thought the projections were reasonable. Ultimately the partners are trying to formulate a valuation to bring to the investment bank.

  1. Using the discounted cash flow approach, why are projected free cash flows, rather than profits, used in estimating the value of the firm?  4 points

DCF approach is a valuation method that values a company by forecasting its future cash flows. Then the NPV can be calculated by discounting all the future cash flows. Projected free cash flows represent how well the company will perform in dollars and the amount of expenditure and depreciation effect on the value of the company. Profits do not consider these factors. Profits are earnings of a company. It is an accounting value based on accounting rules and does not mean the company will generate the same amount of cash value. Because of this, projected free cash flows are more suitable to estimate the value of a company.