Valuation and DCF Analysis

Question 1

intrinsic valuation

Answer 1

valuing a company based on its cash flows, as opposed to external factors like other companies, this method is often called intrinsic valuation.

Question 2

relative valuation

Answer 2

collect sets of “comparable” companies and M&A transactions, calculate their valuation multiples, and then apply those multiples to the company you’re valuing.

Question 3

What investors does unlevered FCF represent

Answer 3

All investors! Thats why you remove things like interest expense.

Question 4

unlevered FCF Formula

Answer 4

NOPAT + Non-Cash Adjustments and Change in Working

Capital from CFS – CapEx

Question 5

What is nopat

Answer 5

Revenue, cogs, operating expenses, taxes

EBIT*(1 - Tax Rate)

Question 6

Why do you take out non-cash adjustments

Answer 6

They aren’t reocurring

Question 7

7 Steps of making projections

Answer 7

1. Project Revenue
2. Assume an Operating (EBIT) Margin or Project COGS and OpEx. ( The simplest approach is to make the company’s Operating Income, or EBIT, a percentage of revenue and to make it grow or decline or over time to reflect business trends.)
3. Calculate NOPAT (Net Operating Profit After Taxes).
4. Project Depreciation & Amortization and Possibly Other Non-Cash Adjustments
5. Project the Change in Working Capital
6. Project Capital Expenditures.
7. Calculate Unlevered FCF ( Start with NOPAT, factor in the non-cash adjustments, add or subtract the Change in Working
   Capital, and subtract CapEx to calculate Unlevered FCF:)

Question 8

Do higher discount rates suggest a firm is more valuable or less valuable? Why?

Answer 8

Higher discount rates suggest more risk, and thus less value to the investor because there are better / safer options elsewhere.

Question 9

How to find pretax cost of debt

Answer 9

Look at debts with coupon rate payments. If they have 1,000 in debt with coupon rate at 5%, cost of debt is 5%.

If they have 1,000 at 5% and another 1000 at 6%, cost of debt is 5.5%.

Question 10

Capital Asset Pricing Model

Answer 10

Used to find cost of equity

Risk Free Rate + Beta (Market Risk Premium)

Question 11

What is less - an unlevered beta or a levered beta?

Answer 11

Unlevered beta is always less than or equal to levered beta

Question 12

What to do with unlevered beta for industry

End Key Rule 3

Answer 12

Use it to relever the beta for the company your analyzing

Question 13

What is the gordon growth method

Answer 13

Used to calculate Terminal Value at the end of DCF. Take the Cash Flows from the final year of the project, multiply it by terminal FCF growth rate, to get the new FCF+1, and then divide by (WACC-G)

Question 14

What two factors make the biggest impact on a DCF

Answer 14

Discount Rate and Terminal Value

Question 15

Explain the WACC cycle, cost of debt, and cost of equity, as companies with no debt take out debt, and continue to take out debt

Answer 15

As companies take out more debt, both the cost of equity and the cost of debt increase because the company is becoming more risky. Despite this, the WACC lowers until about 30% at which point the WACC starts to rise again, because your shift out of equity which always has higher costs.

Question 16

Will increased taxes raise WACC and implied value?

Answer 16

Lowers wacc -

Increased tax reduces cost of equity - when you relever equity beta you reduce for tax.

Increased tax also lowers cost of debt - recognize higher tax = higher benefits.

The problem is the higher tax will have a bigger impact on future FCF’s.

Question 17

How does preferred stock effect WACC and why?

end key rule 5

Answer 17

Preferred stock could be thought of as debt because you are required to make dividend payments. The difference is debt has tax benefits, and preferred stock does not, making it more costly.

Question 18

3 Valuation Methodologies

Answer 18

Public Comps

Precedent Transactions

DCF Analy