Valuation via discounted cash flows Flashcards
what is the discount factor
WACC used as discount factor
Steps of DCF analysis
study performance and determine drivers, project FCF over 5 years, calculate WACC, calculate terminal value, final valuation
how to calculate FCF
EBIT- taxes + depreciation and amortization - CAPEX +/- decrease/increase in NWC.
How to get EBIT prediction for FCF
for public companies use consensus analyst estimates assuming constant margins. For private companies, examine historical trends and estimates for peers.
How to predict tax for FCF
Use marginal tax rate, consider companies effective tax rate
How to predict depreciation and amortization for FCF
Use % of sales or CAPEX from historical data
How to predict CAPEX for FCF
% of sales, if public then future planned expenditures are disclosed.
Terminal value from exit multiple method
Terminal value is a multiple of terminal year n value of EBITDA.
Terminal value from perpetuity growth method
Terminal year FCF treated as perpetuity. (FCFn x 1+g)/ WACC - g
What is sensitivity analysis
Derive valuation range by modifying values of certain inputs, such as WACC.
Pro’s of DCF valuation
focused on fundamentals, more insulated from market fluctuations, no need for comparables, allows scenario analysis
Con’s of DCF analysis
Forecasting, lots of assumptions, heavily affected by terminal value, based on constant capital structure.
