DCF Valuation Modeling

Value of Business

Converting all future cash flows to their present value which is the value today

Time Value of Money

Moving cash flows forward or backward

Present Value Formula

Cash x (1 + growth rate)

Discounting Formula

FV / (1 + discount rate)ⁿ

Enterprise Value

UFCF/WACC

How long to forecast for a DCF model?

Assuming the company is a going concern we would want to forecast forever using a growing perpetuity formula

“going concern”

Assumes that the business will continue to operate indefinitely

Two Parts to Typical DCF Model

Discrete Forecast and Terminal Value

Discrete Forecast

Shows first few years when company grows faster than economy where it then reaches a steady state growing in line with the economy

Terminal Value

Covers the steady state period which continues indefinitely using a growing perpetuity formula to value perpetual growing cash flows

Perpetual Growth Formula

PV = CF / (r - g)

Equity Value Formula

Enterprise Value - Net Debt

Equity Value per Share

Equity Value / Shares Outstanding

Why do we discount unlevered cash flows by WACC?

Numerator/Denominator consistency

Comparable Trading Analysis

Looks at the valuation for similar peer companies that are publicly traded; relative valuation technique and shows market’s view

Precedent Transaction Analysis

Looks at the acquisition prices for similar peer companies in recent transactions; relative valuation technique and shows buyer’s view

Discounted Cash Flow Analysis

Builds a model of the company to get the present value of all future free cash flows; intrinsic valuation technique and shows your view

Deferred Taxes

These taxes are deferred into future periods and governments allow these deferrals to encourage investment; these are non-cash taxes for the company

Current Taxes

These amounts will be paid to the government as tax payments; these represent physical cash outflows from a company

Total Taxes

Current taxes plus deferred taxes

Levered Tax Schedule

Shows taxes with debt in capital structure; used to calculate tax lines on income statement

Unlevered Tax Schedule

Shows taxes without debt in capital structure; used to calculate the tax shield

Total Tax Shield

Difference between unlevered and levered current taxes which shows cash tax savings from having debt in capital structure

Unlevered Free Cash Flow (UFCF)

Cash flows that will be discounted to get the enterprise value

Revenue x EBITDA Margin

EBITDA

WACC Formula

(W of debt x Cost of debt) + (W of equity x Cost of equity)

After-Tax Cost of Debt Formula

pre-tax cost of debt x (1 - tax rate)

Cost of Equity Formula

risk free rate + country risk premium + (market risk premium * levered beta)

Levered Beta Formula

unlevered beta x (1 + (1 - T) x (debt / equity))

Cash Flow Timing

Date we expect cash flow to occur

Valuation Date

Date we will discount all cash flows to

PV₀ (Growing Perpetuity)

FV₁ / (r - g)

Order When Calculating the Equity Value per Share from an Unlevered DCF

Calculate enterprise value, subtract debt, add cash, and divide by shares outstanding