DCF Flashcards
What things do you need to compute the dcf value
Discount rate
Present value of the Unlevered Free Cash Fflow
Present Value of the Terminal Value
What is the DCF
Intrinsic Value of the firm based on unlevered projected free cash flow
what is unlevered
independednt of capital structure
what does free in the free cash flow mean
that its already considered capex, working capital and investment needs
Tell me what the WACC name
What is it used for
What is the formula
Weighted asset cost of capital
it is used for the Discount rate in the dcf
the formula is Ke x e/d.e + Kd(1-t).d/d.e
where ke is cost of equity, e is market value of equity. d is market value of d.
Cost of debt in this case Kd, is taken from the balance sheet, it is essentitally the interest payments made for the debt
Where does CAPM come into play
explain the forumla
what is beta and what does it show
We must use it in the Cost of Equity Ke in the WACC
Ke = rf + Beta x E(rm-rf)
Beta is the market or systematic risk that cannot be diversified away in a portfolio. It measure the riskiness of a stock relative to the market. computed using a regression against a market index. beta greater than one suggests it is more riskier and could be like tech companies, lower than one are probably utility companies
how to calc market value of equity
Share price multiply by outstanding shares
What is the formula Unlevered Free Cash flow to the firm
Start with EBITDA and get to EBIT.
EBIT into (1-T) is the same as NOPAT (net operating profit after tax)
Plus Depreciation and Amortization (non cash expense)
Minus CapitalExpenditure (such as on machinery)
Minus changes in net working capital (inventory)
minus changes in other non cash items
=unlevered FCF (before financing activities)
How do you get the Terminal Value
what weight is placed on this value
what should you have as G
what do you consider for Capex and Deprec in the long term
We can use the perpetuity Growth Model
Terminal Value = FCFn * (1-g)/ r-g
r - wacc g- growth rate, presume it to be the gdp growth rate for the economy,
This Terminal Value is more than 50% compared to the FCF
G should be the same as gdp, never more as it implied the company will eventually grow larger than the economy
Depreciation should be slightly less or the same as capex for the same reason
wqhat should be typcial period that you use the temrinal value from
for a tech company probably 2-3 years
a utlity cmpany probably 5-10 years.
What is Enterprise Value
the combination of the Present Value of FCF and Terminal Value
What is the equity value
what do we typically compare this value to? or do we change it into something more meaningful
It is Enterprise value - net debt, pref and stocks and minority interests plus cash and equivalents
this gives equity value.
divided by the diluted shares gives
equioty valye per share.
can compare this using public and acquisition comparable.
What is the difference between FCFF and FCFE
What is the expected growth
Discount rate used
formula
Free cash flow to the firm and to the equity
FCFF is pre debt cash flow that doesnt consider effect of interest payments.
FCFE post debt cash as it focuses on equity only
Expected growth: FCFF Growth in operating income = reinvestment rate x roc
FCFE Growth in net income
Discount rate: FCFE WACC, FCFE COst of equity
Formula: FCFF EBIT(1-t) + D&A - Chnage in net working capital - capex
FCFE is Net income +D&A - Change in net working capital into (1-debt ratio) - Capex into (1-d)
What are the general pro and con of using the dcf
Very good method but very sensitive to assumptions such as growth rate, margins, discount rate or terminal value
