Chapter 3 - DCF Analysis

Question 1

How do you get to an unlevered free cash flow?

Answer 1

You start with the income statement, get down to the EBIT, subtract taxes to give you earnings before interest and after tax, then add in depreciation and amortization, subtract capital expenditures, and then subtract (or add) the increase in net working capital (or decrease)

Question 2

What discount rate do we use when calculating the present value of the free cash flows and terminal value in a DCF analysis?

Answer 2

The WACC or weighted average cost of capital

Question 3

What are the steps of a DCF analysis?

Answer 3

1. Study the target and determine key performance drivers
2. Project the free cash flows
3. Calculate the weighted average cost of capital
4. Determine the terminal value
5. Calculate the present value and determine the valuation