DCF Model
1. How do you calculate the Terminal Value? - ANS-You can either apply an go out a couple of
to the organisation's Year five EBITDA, EBIT or Free Cash Flow (Multiples Method) or you may
use the Gordon Growth approach to estimate the price based totally on the corporation's boom
charge into perpetuity.
The components for Terminal Value the usage of the Gordon Growth method: Terminal Value =
Final Year Free Cash Flow * (1 + Growth Rate) / (Discount Rate - Growth Rate).
Note that with either technique, you are estimating the same issue: the prevailing price of the
employer's Free Cash Flows from the very last yr into infinity, as of the final year.
1. How do you calculate WACC? - ANS-WACC = Cost of Equity x (% Equity) + Cost of Debt x
(% Debt) x (1 - Tax Rate) + Cost of Preferred x (% Preferred)
In all cases, the chances discuss with how a great deal every thing contains of the agency's
capital shape.
For Cost of Equity, you may use the Capital Asset Pricing Model and for the others you usually
observe comparable agencies and similar debt issuances and the interest prices and yields
issued by using similar organizations to get estimates.
1. Let's talk more about the way you calculate Free Cash Flow. Is it usually accurate to leave out
maximum of the Cash Flow from Investing section and all of the Cash Flow from Financing
phase? - ANS-Most of the time, yes, due to the fact all gadgets apart from CapEx are normally
non- recurring, or at the least do not recur in a predictable manner.
If you have strengthen expertise that a business enterprise is going to promote or buy a positive
quantity of securities, difficulty a certain quantity of stock, or repurchase a certain range of
shares each yr, then positive, you may factor the ones in. But it's extraordinarily rare to do this.
1. What's the fundamental concept at the back of a Discounted Cash Flow analysis? - ANS-The
idea is which you fee a business enterprise primarily based on the present fee of its Future
Cash Flows
You divide the future into a "near future" duration of 5-10 years after which calculate, venture,
cut price, and add up the ones Free Cash Flows; and then there is additionally a "far future"
length for everything past that, that you cannot estimate as precisely, however which you could
approximate the usage of specific methods.
You need to cut price the entirety back to its gift value due to the fact cash these days is well
worth greater than money the following day.
, 1. You're looking at two companies, each of which produce equal overall Free Cash Flows over
a 5-year duration. Company A generates 90% of its Free Cash Flow inside the first yr and 10%
over the closing 4 years. Company B generates the identical quantity of Free Cash Flow in each
year.
Which one has the higher internet gift value? - ANS-Company A, because money today is really
worth greater than money day after today. All else being equal, generating better coins flow
earlier on will continually raise a corporation's fee in a DCF.
10. An opportunity to the DCF is the Dividend Discount Model (DDM). How is it distinct in the
preferred case (i.E. For a everyday organization, now not a business financial institution or
insurance firm?) - ANS-The setup is comparable: you continue to assignment sales and charges
over a five-10 yr duration, and you continue to calculate Terminal Value.
The distinction is which you do not calculate Free Cash Flow - alternatively, you forestall at Net
Income and count on that Dividends Issued are a percentage of Net Income, and then you
discount the ones Dividends returned to their gift value using the Cost of Equity.
Then, you upload the ones up and add them to the prevailing price of the Terminal Value, that
you might base on a P / E multiple as an alternative (dividends come out of internet profits).
Finally, a Dividend Discount Model gets you the enterprise's Equity Value instead of its
Enterprise Value because you're the use of metrics that encompass interest earnings and price.
10. How can you take a look at whether or not your assumptions for Terminal Value the use of
the Multiples Method vs. The Gordon Growth Method make feel? - ANS-The most common
technique right here is to calculate Terminal Value using one technique, and then to see what
the implied long-term increase price or implied a couple of through the other technique would
be.
Example: You calculate Terminal Value with an extended-term boom price assumption of 4%.
Terminal Value is $10,000. You divide that Terminal Value by means of the very last 12 months
EBITDA and get an implied EBITDA a couple of of 15x - however the Public Comps are only
buying and selling at a mean of 8x EBITDA. In this situation your assumption is nearly genuinely
too aggressive and also you must reduce that lengthy- term increase charge.
10. Let's say that we want to analyze some of these factors in a DCF. What are the maximum
not unusual sensitivity analyses to apply? - ANS-Common sensitivities:
• Revenue Growth vs. Terminal Multiple
• EBITDA Margin vs. Terminal Multiple
• Terminal Multiple vs. Discount Rate
• Terminal Growth Rate vs. Discount Rate
10. Let's say that you use Unlevered Free Cash Flow in a DCF to calculate Enterprise Value.
Then, you figure backwards and use the business enterprise's Cash, Debt, and so forth to
calculate its implied Equity Value.
1. How do you calculate the Terminal Value? - ANS-You can either apply an go out a couple of
to the organisation's Year five EBITDA, EBIT or Free Cash Flow (Multiples Method) or you may
use the Gordon Growth approach to estimate the price based totally on the corporation's boom
charge into perpetuity.
The components for Terminal Value the usage of the Gordon Growth method: Terminal Value =
Final Year Free Cash Flow * (1 + Growth Rate) / (Discount Rate - Growth Rate).
Note that with either technique, you are estimating the same issue: the prevailing price of the
employer's Free Cash Flows from the very last yr into infinity, as of the final year.
1. How do you calculate WACC? - ANS-WACC = Cost of Equity x (% Equity) + Cost of Debt x
(% Debt) x (1 - Tax Rate) + Cost of Preferred x (% Preferred)
In all cases, the chances discuss with how a great deal every thing contains of the agency's
capital shape.
For Cost of Equity, you may use the Capital Asset Pricing Model and for the others you usually
observe comparable agencies and similar debt issuances and the interest prices and yields
issued by using similar organizations to get estimates.
1. Let's talk more about the way you calculate Free Cash Flow. Is it usually accurate to leave out
maximum of the Cash Flow from Investing section and all of the Cash Flow from Financing
phase? - ANS-Most of the time, yes, due to the fact all gadgets apart from CapEx are normally
non- recurring, or at the least do not recur in a predictable manner.
If you have strengthen expertise that a business enterprise is going to promote or buy a positive
quantity of securities, difficulty a certain quantity of stock, or repurchase a certain range of
shares each yr, then positive, you may factor the ones in. But it's extraordinarily rare to do this.
1. What's the fundamental concept at the back of a Discounted Cash Flow analysis? - ANS-The
idea is which you fee a business enterprise primarily based on the present fee of its Future
Cash Flows
You divide the future into a "near future" duration of 5-10 years after which calculate, venture,
cut price, and add up the ones Free Cash Flows; and then there is additionally a "far future"
length for everything past that, that you cannot estimate as precisely, however which you could
approximate the usage of specific methods.
You need to cut price the entirety back to its gift value due to the fact cash these days is well
worth greater than money the following day.
, 1. You're looking at two companies, each of which produce equal overall Free Cash Flows over
a 5-year duration. Company A generates 90% of its Free Cash Flow inside the first yr and 10%
over the closing 4 years. Company B generates the identical quantity of Free Cash Flow in each
year.
Which one has the higher internet gift value? - ANS-Company A, because money today is really
worth greater than money day after today. All else being equal, generating better coins flow
earlier on will continually raise a corporation's fee in a DCF.
10. An opportunity to the DCF is the Dividend Discount Model (DDM). How is it distinct in the
preferred case (i.E. For a everyday organization, now not a business financial institution or
insurance firm?) - ANS-The setup is comparable: you continue to assignment sales and charges
over a five-10 yr duration, and you continue to calculate Terminal Value.
The distinction is which you do not calculate Free Cash Flow - alternatively, you forestall at Net
Income and count on that Dividends Issued are a percentage of Net Income, and then you
discount the ones Dividends returned to their gift value using the Cost of Equity.
Then, you upload the ones up and add them to the prevailing price of the Terminal Value, that
you might base on a P / E multiple as an alternative (dividends come out of internet profits).
Finally, a Dividend Discount Model gets you the enterprise's Equity Value instead of its
Enterprise Value because you're the use of metrics that encompass interest earnings and price.
10. How can you take a look at whether or not your assumptions for Terminal Value the use of
the Multiples Method vs. The Gordon Growth Method make feel? - ANS-The most common
technique right here is to calculate Terminal Value using one technique, and then to see what
the implied long-term increase price or implied a couple of through the other technique would
be.
Example: You calculate Terminal Value with an extended-term boom price assumption of 4%.
Terminal Value is $10,000. You divide that Terminal Value by means of the very last 12 months
EBITDA and get an implied EBITDA a couple of of 15x - however the Public Comps are only
buying and selling at a mean of 8x EBITDA. In this situation your assumption is nearly genuinely
too aggressive and also you must reduce that lengthy- term increase charge.
10. Let's say that we want to analyze some of these factors in a DCF. What are the maximum
not unusual sensitivity analyses to apply? - ANS-Common sensitivities:
• Revenue Growth vs. Terminal Multiple
• EBITDA Margin vs. Terminal Multiple
• Terminal Multiple vs. Discount Rate
• Terminal Growth Rate vs. Discount Rate
10. Let's say that you use Unlevered Free Cash Flow in a DCF to calculate Enterprise Value.
Then, you figure backwards and use the business enterprise's Cash, Debt, and so forth to
calculate its implied Equity Value.
