Diageo plc - Full Valuation Framework

This appendix is designed to be skimmed. It consolidates the core model outputs and the assumptions that drive intrinsic value.

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1) Capital Structure and WACC

Diageo reports in USD and generates cash flows globally, so the valuation was conducted in USD. The US 10-year Treasury was used as the risk-free rate for consistency with the base currency.

Market Value Weights (as of 22 Aug 2025)

Item	Value
Shares outstanding (bn)	2.228
Share price (GBp)	2,121
Market value of equity (GBP, bn)	47.256
Spot FX (USD/GBP)	1.3527
Market value of equity (USD, bn)	63.923
Market value of debt (USD, bn)	22.593
Total capital (USD, bn)	86.516
Equity weight	73.9%
Debt weight	26.1%

Cost of Equity (CAPM)

Input	Assumption	Note
Risk-free rate	4.3%	US 10-year Treasury
Equity risk premium	4.5%	Long-run developed market assumption
Beta	0.76	3-year adjusted beta (Capital IQ)

Cost of equity:

• 4.3% + (0.76 × 4.5%) ≈ 7.7%

Cost of Debt (Triangulated)

Two methods were used to avoid relying on a single view of credit pricing.

Method 1 - Backward-looking (reported cash interest)

Metric	Value
Cash interest paid (FY25, $m)	980
Average total debt (FY25, $m)	23,546
Pre-tax cost of debt	4.2%
Effective tax rate	25%
After-tax cost of debt	3.1%

Method 2 - Market-implied (CDS + Treasury)

Metric	Value
5Y Treasury	3.96%
5Y CDS spread	0.33%
Pre-tax cost of debt	4.29%
After-tax cost of debt (25% tax)	3.2%

WACC

Component	Value
Cost of equity	7.7%
After-tax cost of debt	3.1%
Equity weight	73.9%
Debt weight	26.1%
WACC	6.5%

Sanity check: Diageo is a defensive, investment-grade consumer franchise. A 6% to 7% WACC range is economically reasonable.

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2) ROIC and Economic Spread

ROIC is most useful when paired with cost of capital. The spread captures whether incremental investment compounds value or merely expands scale.

Year	ROIC (ex-goodwill)	WACC	Spread
FY21	21.4%	6.2%	15.2%
FY22	19.6%	6.2%	13.4%
FY23	18.0%	6.2%	11.8%
FY24	16.0%	6.2%	9.8%

The direction matters. A narrowing spread typically reflects some combination of slower organic growth, heavier acquisition intensity, and more capital tied up in working capital.

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3) DCF Model Structure

The model is a standard unlevered DCF:

• Forecast unlevered free cash flow (NOPAT + D&A - capex - change in NWC)
• Discount at WACC
• Add terminal value using a perpetual growth assumption
• Subtract net debt to arrive at equity value
• Divide by shares outstanding for per-share value

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4) Base Case Assumptions (FY25 onwards)

These assumptions are the primary value drivers. They should be read as a disciplined view of what must be true for the current price to be attractive.

Driver	Base Case
Revenue CAGR	4.5%
EBIT margin	31.0%
Terminal growth	2.0%
WACC	6.5%

If you want to add more granularity, include:

• Reinvestment rate (capex as % of sales)
• Working capital intensity (ΔNWC as % of sales)
• Tax rate assumption
• Terminal margin assumption

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5) DCF Summary (Base Case)

Output	Value
Enterprise value	$96.9 bn
Net debt	$21.9 bn
Equity value	$72.9 bn
Value per share	$32.71 (≈ £24.37)
Current price (22 Aug 2025)	£21.10
Implied upside	~15%

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6) Sensitivity Analysis (WACC vs Terminal Growth)

Implied value per share (USD).

g \ WACC	6.00%	6.25%	6.50%	6.75%	7.00%
1.50%	25.22	23.16	21.32	19.65	18.14
1.75%	27.06	24.79	22.76	20.94	19.30
2.00%	29.14	26.61	24.37	22.37	20.57
2.25%	31.49	28.66	26.17	23.96	21.98
2.50%	34.17	30.98	28.19	25.73	23.55

A 50 bps increase in WACC typically reduces value by high single digits, which is why terminal assumptions and discount rate discipline matter.

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7) Scenario Analysis

Scenario	Revenue	EBIT margin	g	WACC	Implied price	Upside/Downside
Bear	2.5%	28.7%	2.0%	6.8%	$22.35	-21%
Base	4.5%	31.0%	2.0%	6.5%	$32.71	+15%
Bull	5.5%	33.5%	2.1%	6.5%	$40.14	+42%

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8) Relative Valuation Cross-Check

Method	Multiple	Implied price	Upside
EV/EBITDA	13.3x	28.96	2%
P/E	17.0x	28.86	2%

Relative valuation suggests limited dependence on a near-term re-rating. The base case relies on free cash flow durability.

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9) Additional Schedules (DuPont, CCC)

DuPont decomposition (ROE drivers)

ROE Breakdown

Year	Net Margin	Asset Turnover	Equity Multiplier	ROE
FY21	20.9%	0.40x	4.77x	40.0%
FY22	20.9%	0.46x	4.66x	45.1%
FY23	21.6%	0.46x	4.62x	46.1%
FY24	19.1%	0.45x	4.54x	38.9%
FY25	11.6%	0.43x	4.49x	22.3%

ROE = Net Margin × Asset Turnover × Equity Multiplier.

The compression in ROE since FY23 is primarily margin-driven. Asset turnover has remained broadly stable, while the equity multiplier has gradually declined. The decline therefore reflects operating pressure rather than increased financial leverage.

Cash conversion cycle

Working Capital Metrics (Days)

Year	DSO	DIO	DPO	CCC
FY21	63	417	296	184
FY22	60	390	309	142
FY23	62	405	307	161
FY24	62	442	297	207
FY25	63	464	303	224

Cash Conversion Cycle = DSO + DIO - DPO.

Inventory days have risen meaningfully, reflecting aging requirements and premiumisation in spirits. Receivables discipline remains stable, while payables have not expanded sufficiently to offset higher inventory intensity. The result is a structurally longer cash cycle and higher capital absorption.

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