Equity Valuation Using DCF Models

This set of flashcards covers key concepts and definitions related to equity valuation, DCF models, and financial metrics relevant for understanding investment analysis.

DCF Valuation

A method for valuing a company by estimating its expected future cash flows and discounting them to present value.

Free Cash Flow (FCF)

The cash generated by a company's operations that is available for distribution to its investors.

Profit vs. Free Cash Flow

Profit can be manipulated and is not always comparable to cash flows, while free cash flow provides a clearer picture of financial health.

Terminal Value

The estimated value of a company's cash flows beyond a specific forecasting period.

Weighted Average Cost of Capital (WACC)

The average rate of return that a company is expected to pay its security holders to finance its assets.

Enterprise Value (EV)

The total value of a business, calculated as market capitalization plus debt, minority interest, and preferred shares, minus total cash and cash equivalents.

Market Value of Equity

The value of a company's equity shares determined by the stock market.

NOPLAT (Net Operating Profit Less Adjusted Taxes)

Operating profit of a company after taxes, without considering financing effects.

Investment Rate (K)

The proportion of NOPLAT that is reinvested into ongoing operations.

Return on Invested Capital (ROIC)

A measure of a company's efficiency at allocating the capital under its control to profitable investments.

Economic Profit (EVA)

The value created by a company above the minimum required return of its investors.

Discount Rate

The rate used to discount future cash flows back to their present value, reflecting the risk of those cash flows.

Growth Rate (g)

The expected annual percentage increase in a company's cash flows or profits.

Cash Flow to Equity (FCFE)

The amount of cash that can be distributed to shareholders after all expenses, debts, and reinvestments have been paid.

Cash Flow to Firm (FCFF)

The cash flow available to all investors (both equity and debt holders) in the firm.

Value Drivers

Factors that influence the value of a company, such as revenue growth, operating efficiency, and investment strategies.

Perpetuity

A constant stream of identical cash flows with no end, used in DCF modeling to derive terminal value.