Discounted Cash flow - Basic
12 important questions on Discounted Cash flow - Basic
Walk me through how you get from Revenue to Free Cash Flow in the projections?
- Revenue - COGS - operating expenses = EBIT
- EBIT - taxes + D&A - CapEx - non cash working capital = UFCF
What’s an alternate way to calculate Free Cash Flow aside from taking Net Income, adding back Depreciation, and subtracting Changes in Operating Assets / Liabilities and CapEx?
Why do you use 5 or 10 years for DCF projections?
- 5 years: for more mature companies who have stable CF
- 10 years: for growth companies who need time to stabilize
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How do you get to Beta in the Cost of Equity calculation?
- Look up beta for each comparable company
- Unlever each beta
- Take median
- Lever based on company -> use this in cost of equity calculation
Un-Levered Beta = Levered Beta / (1 + ((1 - Tax Rate) x (Total Debt/Equity)))
Levered Beta = Un-Levered Beta x (1 + ((1 - Tax Rate) x (Total Debt/Equity)))
Why do you have to un-lever and re-lever Beta?
- Unlever: each company’s capital structure is different, and we want to look at how “risky” a company is regardless of what % debt or equity it has.
- Lever: we need to re-lever it because we want the Beta used in the Cost of Equity calculation to reflect the true risk of our company, considering its capital structure this time.
Let’s say that you use Levered Free Cash Flow rather than Unlevered Free Cash Flow in your DCF – what is the effect?
If you use Levered Free Cash Flow, what should you use as the Discount Rate?
How do you calculate the Terminal Value?
- Apply exit multiple (EV/EBITDA) to company's last EBITDA,EBIT
- Apply the perpetuity growth
Why would you use Gordon Growth rather than the Multiples Method to calculate the Terminal Value?
What’s an appropriate growth rate to use when calculating the Terminal Value?
- GDP growth
- Inflation
How do you select the appropriate exit multiple when calculating Terminal Value?
Which method of calculating Terminal Value will give you a higher valuation?
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