Editing Shoprite Holdings Limited (section)

=== Discounted Free Cash Flows ===
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The weighted average cost of capital (WACC) is used as the discount rate in the DCF model, as free cash flows to the firm (FCFF) are used to calculate the enterprise value of the firm. The cost of equity (9.38%) was calculated using the capital asset pricing model (CAPM). The risk-free rate (8.885%) was assumed to be the 10-year treasury bond rate as it is considered to carry less risk than South African bonds. The beta (0.16) is the 5-year monthly historical beta of Shoprite. The market return (12%) is taken to be the 10-year average return of the JSE, where Shoprite is listed. The cost of debt (8.08%) is estimated as interest expense divided by total debt, as actual cost of debt was not found to be explicitly stated in the company’s report. 
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Having completed a forecast and calculated the WACC, the DCF method was implemented to arrive at an enterprise value of 235 465 000 000 ZAR. The terminal value was calculated using a perpetual growth rate of 2%, which is estimated to be in line with South Africa’s future GDP growth rate. After discounting the cash flows using the WACC and arriving at an enterprise value, an equity value of 209 330 000 000 ZAR was then estimated. Thereafter, an implied share price of 381.99 ZAR was calculated by dividing the equity value by the number of shares outstanding (548 million shares). Based on this valuation and relative to the actual share price of 258.68 ZAR, Shoprite would be viewed as being undervalued and a buy recommendation would be issued.