This thesis examined the intrinsic equity value of British American Tobacco (BAT) using two fundamental discounted cash flow models: the Free Cash Flow to Firm (FCFF) model and the Dividend Discount Model (DDM). The objective was to assess how well traditional valuation techniques capture the financial implications of BAT’s strategic transition from combustible tobacco to reduced-risk products.

Segment-level forecasts were developed based on historical data and strategic targets, incorporating differences in growth, margins, and capital allocation across product lines. To account for regulatory uncertainty, a Monte Carlo simulation was implemented across three scenarios: Mild, Moderate, and Severe Regulation, using probability-weighted inputs for key variables such as revenue growth, discount rates, and segment performance. The FCFF model yielded a probability-weighted valuation of 4,069 GBX per share, indicating moderate undervaluation, while the DDM produced a more conservative estimate of 2,826 GBX per share.

These results reflected the structural limitations of DDM, particularly its reliance on payout ratios. The analysis demonstrated that combining deterministic valuation with probabilistic and scenario-based techniques allows for a more realistic assessment of companies undergoing structural change in highly regulated industries.

The findings may serve as a framework for valuing firms navigating similar business transformations.