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Dcf

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13 views11 pages

Dcf

Uploaded by

5811 Miti Goyal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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WALK ME

THROUGH A DCF
In the most simple way
Introduction
A DCF (Discounted CashFlow) model values a company by forecasting its future
cash flows and then discounting them to the present value.

DCF = CF1 / (1+r) + CF2 / (1+r)^2 + ... + TV / (1+r)^n


Where:
CF = Cash Flow
r = Discount Rate (Cost of Capital)
TV = Terminal Value
Structure - How will you Start
1. Calculate Stage 1 Free CashFlows
2. Calculate Terminal Value(TV) - Stage 2
3. Discount Stage 1 + Stage 2 Cashflows at the WACC (Weighted
Average Cost of Capital)
4. Subtract Debt + Add Cash to go from Enterprise Value(EV) to
Equity Value
5. Divide Equity Value by the No. of Diluted Shares to get to Price
per Share.
Step 1 - Project Future CFs

First, forecast the company’s free cash flows (FCF) for a certain period, typically
5–10 years. Beyond 10 years, DCF is generally not reliable.

Free CashFlows (to the firm) : NOPAT + D&A -Increase in NWC -Capex
Step 2 - Estimate Terminal Value (TV)
At the end of your projection period, you calculate the company’s Terminal
Value. This represents the value of the business beyond the forecasted period.

Two methods to calculate TV:

1. Perpetuity Growth Method:


TV = FCF * (1 + g) / (r - g) ; where g = growth rate.

2. Exit Multiple Method (Shortcut Method):


TV = EBITDA * Exit Multiple (based on industry standards).
Step 3 - Discount Stage 1 + Stage 2 Cashflows

Since the DCF-derived value is based on the present date, both


the initial forecast period and the terminal value need to be
discounted to the current period using the discount rate that
matches the free cashflows projected.

PV(Present Value) = CF / (1 + WACC)^n...+ TV / (1 + WACC)^n


## What is WACC used in previous slide ?

WACC is the blended discount rate applicable to all


stakeholders,i.e. required rate of return and discount rate for
unlevered CFs.
WACC = (E/V) * Re + (D/V) * Rd * (1-T) ;
where
E = Equity, D = Debt, V = Total Capital (E+D)
Re = Cost of Equity, Rd = Cost of Debt
T = Tax Rate
Step 4 - Add Everything Together

Add up the present value of your projected cash flows and the
discounted terminal value. This total gives you the Enterprise
Value (EV) of the company.

EV = PV of Cash Flows + PV of Terminal Value


## Subtract Debt + Add Cash to go from
Enterprise Value(EV) to Equity Value

Last but not least, we got To find the company’s Equity Value.

Equity Value: Enterprise Value - Net Debt + Cash


Step 5 - Calculating Equity Value per Share

The equity value is divided by the total no. of diluted shares


outstanding as of the valuation date to arrive at the DCF-
derived share price/equity value per share.

## Helps in identifying if a company is trading at a


premium/discount/par(fairly priced) in comparison to its
intrinsic value.
You’re done!
Practice this approach, and
you'll nail your finance interviews.
Follow me for more insights!

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