DCF Fundamentals/Modeling Flashcards
What is the point of a DCF in the first place?
DCF is the core central method of business valuation. It’s one of three primary methods. The other methods: Trading and Transaction Comparables are ‘shorthand’ analyses
What are the two approaches to DCF valuation?
- Unlevered DCF (excludes debt impact)
- Levered DCF (includes debt impact)
What is step 1 of a DCF model?
Project Future Cash Flows until the Business reaches maturity
- calculate the Cash flow including the impact of taxes, CAPEX, Working capital
EBIT
- income taxes
+ D&A (lowers taxes)
+/- net working capital
- CAPEX
What is step 2 in a DCF model?
Calculate Terminal Value
- two methods: Perpetuity Growth Method or Exit Multiple Method
- Growth Method: take final year cash flow and project it at a constant growth rate, and then discount the cash flows back to the final period of stage 1.
- Exit Multiple Method: use Peer Valuation Multiple (EV/EBITDA) * Year 5 EBITDA
What is step 3 in a DCF model?
Discount the Projected Cash Flows and Terminal Value using the Weighted Average Cost of Capital (WACC)
- find a discount rate that reflect the risk of the cash flow stream being valued
- The Cost of Equity Formula:
- the expected tiritón of our lenders is the interest rate that they would charge to lend to the company
- The CAPM is used to help figure out what return investors will expect
- discount cash flows:
- Use the WACC to discount stage 1 cash flows and Stage 2 terminal value back to today
What is step 4 in a DCF model?
Work from Enterprise Value to Equity Value by subtracting Debt and adding Cash
- Equity value = Enterprise Value - Debt + Cash
Then divide the equity value/shares so that they have a large number of owners
What is step 5 in a DCF model?(optional)
Calculate Price Per Share by dividing Equjty Value by the Number of Shares
- divide the equity value by the Fully Diluted Share Count of the Business
- not the basic shares because basic shares are only the ones outstanding
