Valuation Methods Flashcards
What is Discounted Cash Flow (DCF) analysis?
DCF estimates the value of an asset by calculating the present value of expected future cash flows.
What is the key principle behind DCF analysis?
DCF is based on the time value of money, meaning future cash flows are discounted to their present value.
What are the key components of DCF?
Cash flows (typically Free Cash Flow), discount rate (often WACC), and terminal value.
What is Free Cash Flow (FCF)?
FCF is the cash generated by a business after accounting for capital expenditures, taxes, and changes in working capital.
What is the discount rate commonly used in DCF?
Weighted Average Cost of Capital (WACC) is commonly used as the discount rate in DCF analysis.
What is terminal value in DCF analysis?
Terminal value is the estimated value of the company’s cash flows beyond the forecast period.
What are the two methods to calculate terminal value?
The perpetual growth method and the exit multiple method.
What is an advantage of DCF analysis?
It provides an intrinsic value based on the company’s fundamentals rather than market conditions.
What is a disadvantage of DCF analysis?
It is highly sensitive to assumptions such as growth rates and discount rates.
What is Comparable Companies Analysis (Comps)?
Comps is a relative valuation method that compares a company to publicly traded companies with similar characteristics.
What financial multiples are commonly used in Comps?
P/E Ratio, EV/EBITDA, and Price-to-Sales (P/S) ratio are commonly used.
What does the Price-to-Earnings (P/E) ratio compare?
It compares the market price per share to earnings per share (EPS).
What is an advantage of Comps?
It reflects current market conditions, making it relevant for immediate pricing decisions.
What is a disadvantage of Comps?
It may not reflect intrinsic value if the market is overvalued or undervalued.
What is Precedent Transactions Analysis (PTA)?
PTA evaluates a company’s value by analyzing past M&A transactions involving similar companies.
