Discounted Cashflow

Question 1

What is a DCF?

Answer 1

Simple: DCF measures the value of an asset based on the amount of cash it can produce

A DCF is a valuation methodlogy that measures the intrinsic value of a company based on the sum of the present value of its future cash flows

First step: project FCF for 5-10 years making assumptions for revenue growth und margins; then calculate terminal calue by using exit multiple or perpetuity growth method

Then: Discount back projected FCF and terminal value using WACC to the present value and sum them together to get enterprise value

Question 2

5 Steps of DCF

Answer 2

1) Project FCF
2) Calculate weighted average cost of capital (WACC)
3) Calculate Terminal Value
4) Discount to present value
5) Calculate implied share price

Question 3

DCF Step 1) Calculate FCF

Answer 3

EBIT x (1- Tax rate)
+ Depreciation & Amortization
- CAPEX
- Change in Working Capital (Current Operating Assets - Current Operating Liabilities)

= FCF

Question 4

DCF Step 2) Calculate WACC: Definition and Formula

Answer 4

Definition:
-Rate of return required by debt and equity investors for your company to fund the growth of its future free cash flow
- The discount rate is used to determine the present value of FCF

Formula:
(%of Equity x Cost of Equity) + (% of Debt x Cost of Debt) x (1- Tax Rate)

Cost of Equity= Risk free Rate + beta x (Expected Market Return - Risk Free Rate)

Question 5

DCF Step 3) Calculate Terminal Value

Answer 5

Perpetuity Growth Method: Last year FCF x (1+TGR)/(WACC-TGR)

Exit Multiple Method: Last Year EBITDA x Exit Multiple

Question 6

DCF Step 4) Discount back to Present Value (PV)

Answer 6

Formula: FCF for Year X / (1+ WACC)^(Year X)

For Terminal Value -> ^of last year

Question 7

DCF Step 5) Calculate implied share price

Answer 7

Sum of PV Free Cash flows
+ PV of Terminal Value
= PV of Terminal Value

• Debt
  + Cash
  = Equity Value