DCF Valuation Modeling Flashcards
(53 cards)
What is the primary purpose of a discounted cash flow (DCF) model?
To estimate the intrinsic (absolute) value of a business by discounting its future free cash flows to present value.
Which two critical dates must always be considered in a DCF model?
The Valuation Date (present‑value anchor) and the Cash‑Flow Timing date(s) within each forecast year.
What are the two parts of a typical DCF forecast?
Part 1: Discrete forecast period (explicit years of higher growth);
Part 2: Terminal value (steady‑state cash flows growing indefinitely).
How long do you need to forecast in a DCF model according to the slides?
Forever—cash flows must be projected indefinitely, handled via terminal value after the explicit period.
Write the compact growing‑perpetuity formula for terminal value in Year N.
PVₙ = CFₙ₊₁ / (r – g) where CFₙ₊₁ is the cash flow in the first terminal year, r is discount rate (WACC) and g is perpetual growth.
Why must the numerator and denominator be consistent when valuing with DCF?
Because both should represent the same group of capital providers; otherwise the enterprise/equity value will be mismatched.
Which cash flow should be paired with WACC for valuation consistency?
Unlevered Free Cash Flow (UFCF), because both consider all capital providers (debt and equity).
Which discount rate should be used when valuing Levered Free Cash Flow?
Cost of equity (Re), since both numerator and denominator relate solely to equity holders.
What simple definition did the slides give for enterprise value (EV)?
The present value of cash flows available to all capital providers (debt + equity).
How do you convert enterprise value to equity value?
Equity Value = Enterprise Value – Net Debt (Total Debt – Cash).
State the first ‘important finance equation’ used for discounting cash flows.
PV = FV / (1 + r)ⁿ
What interpretation did the course prefer over ‘Time Value of Money’ and why?
‘Time Quantity of Money,’ because the quantity of money changes with compounding/discounting.
List the four basic adjustments made when deriving UFCF via the EBITDA method.
Subtract current cash taxes, capital expenditure, and change in working capital from EBITDA.
Which two additional items appear in the Net‑Income method that reconcile to UFCF?
Add back depreciation & deferred tax, add interest expense, then subtract the tax shield from interest.
How is the tax shield from interest expense calculated in the model?
It equals Current Taxes (Unlevered) – Current Taxes (Levered).
Why does the Net‑Income method start with a ‘levered’ term and end ‘unlevered’?
Because it removes the effects of financing (interest and related tax shield) to reach cash flows available to all providers.
Which two tax schedules are built in the model and what do they show?
Levered Tax Schedule (taxes with debt) and Unlevered Tax Schedule (taxes without debt) to isolate the tax shield.
What are ‘model drivers’ and why are they isolated in the inputs tab?
Volatile, high‑impact assumptions (e.g., sales volume growth, pricing) tested with best/base/worst cases to gauge sensitivity.
Why does the instructor advocate designing the model ‘backwards’ from outputs?
Ensures every schedule directly supports key outputs and contains the right level of detail.
Name three operational schedules typically housed in the ‘Model’ tab.
Revenue schedule, cost schedule, working‑capital schedule (others include depreciation, tax, asset schedules).
What metaphor describes FP&A visibility across the organisation in the earlier FP&A course and also suits a well‑designed model?
The ‘Financial Control Tower’—central visibility with information flowing to all stakeholders.
Write the generic WACC formula.
WACC = (Wd × Rd) + (We × Re) where Wd and We are capital weights.
How is after‑tax cost of debt computed?
Rd = Rp × (1 – T) where Rp is pre‑tax yield and T is the marginal tax rate.
Which equation is used to calculate cost of equity in the slides?
Re = Rf + Rc + (Rm × βL)
