Valuation and Cash Flow Analysis

This set of flashcards covers key concepts related to valuation techniques, cash flow analysis, and financial metrics derived from the lecture notes.

What is the formula to compute Equity Value using discounted cash flows?

PV of cash flows + PV of terminal value.

What are the components of Free Cash Flow (FCF)?

Revenue → EBIT → (1–tax) → +D&A → –CapEx –ΔWC.

How is Levered Free Cash Flow calculated?

CFO – CapEx – debt repayments; adjust for interest.

What is the significance of a reasonable forecasting horizon?

It provides a reliable basis to project future cash flows.

What does WACC stand for?

Weighted Average Cost of Capital.

What is the formula for WACC?

WACC = CoE×E% + CoD×D%×(1–Tax) + CoP×Pref%.

How do you calculate the Cost of Equity (CoE)?

Risk-free rate + Beta × Equity Risk Premium (ERP).

What is the purpose of using unlevered comparables?

To average and relever them.

Why do we remove capital structure effects when valuing companies?

To ensure comparability across firms.

What is the impact of technology on valuation?

It can lead to higher valuation due to growth potential.

What does Levered Free Cash Flow provide?

It gives the Equity Value.

What is the Cost of Equity?

The return required by equity investors.

What are two methods for terminal value calculation?

Multiples or Gordon Growth.

When is the Gordon Growth model particularly useful?

When there are no good comparables or unstable multiples.

What does terminal growth relate to in economic terms?

GDP/inflation, typically around 2–5%.

What is used to determine exit multiples in valuation?

Median comparables and their range.

Why are multiples considered more variable?

Because they depend on market conditions and comparisons.

What is a flaw in using multiples for valuation?

They may change over time.

What does a terminal value above 50% indicate?

It suggests a reliance on terminal value for valuation accuracy.

How does company size affect Cost of Equity (CoE)?

CoE is typically higher for smaller firms.

Does WACC generally vary by firm size?

Yes, it is usually higher for smaller firms.

How does increased debt influence CoE?

More debt leads to a higher Cost of Equity.

What should be done with operational debt in analysis?

It should be reflected in beta adjustments.

How is CoE formulated?

By combining dividend yield and growth expectations.

What effect does having no debt have on valuations?

It leads to a lower Cost of Equity.

What significance does a 10% revenue change have?

It has a larger impact on overall valuation.

What happens when the discount rate changes by 1%?

It has a larger effect on present value outcomes.

How can WACC be determined?

By using comparables or estimates.

Why shouldn't one just adjust estimates?

Instead, one should build their own models and do sensitivity analysis.

What role does operational debt play in valuation?

It affects the levered Free Cash Flow but is ignored in unlevered calculations.

What are the key drivers of a DCF model?

Growth rates, profit margins, multiples, and discount rate.