DCF Flashcards
1
Q
Why do you build a DCF analysis to value a company?
A
You build a DCF analysis because a company is worth the Present Value of its expected future cash flows:
2
Q
what is a DCF analysis?
A
A DCF values a company based on the Present Value of its Cash Flows in the explicit forecast period plus the Present Value of its Terminal Value.
3
Q
Walk me through a DCF analysis
A
- You start by projecting the company’s Free Cash Flows over the next 5-10 years by making assumptions for revenue growth, margins, Working Capital, and CapEx.
- Then, you discount the cash flows using the Discount Rate, which is the Weighted Average Cost of Capital
- Next, you estimate the company’s Terminal Value using the Multiples Method or the Gordon Growth Method; it represents the company’s value after the projection period into perpetuity.
- You then discount the Terminal Value to Present Value using the Discount Rate and add it to the pv of the discounted cash flows from the projection period.
- Finally, you compare this Implied Value to the company’s Current Value, usually its Enterprise Value, and you’ll often calculate the company’s Implied Share Price so you can compare it to the Current Share Price.
4
Q
Walkthrough: 1)You start by projecting the company’s Free Cash Flows over the next 5-10 years by making assumptions for revenue growth, margins, Working Capital, and CapEx.
A
- Project it until it reaches a steady state
- You want to calculate unlevered CF**- represents company’s recurring CF that’s available to all investors. your projection structure starts from Revenue then you subtract cogs to get operating profit then you subtract operating expenses (make sure D&A is not embedded). This gives you EBITDA, then you subtract D&A to get EBIT. Now at this point you want to get NOPAT as a proxy for EBIAT so multiply (1- tax rate). Now you add back non cash adjustments, namely Depreciation & Amortization and subtract capex and change in net working capital
