Valuation 1: DCF Flashcards
(30 cards)
What does a DCF model aim to estimate?
The intrinsic value of a business based on its projected future cash flows, discounted to present value.
Why is DCF useful in M&A?
It provides a standalone valuation of a target, independent of market noise, and helps set a price ceiling or floor.
What is the formula for a basis DCF?
DCF = FCF / (1 + WACC)^t + TV / (1 + WACC)^n
What does the discount rate in DCF represent?
The required return for investors, accounting for the time value of money and business risk - typically WACC.
What are the two main components of a DCF valuation?
The sum of discounted projected FCFs and the discounted Terminal Value.
What is Unlevered Free Cash Flow (UFCF)?
Cash generated by the business before interest payments; available to both debt and equity holders.
What is the formula for Unlevered Free Cash Flow?
EBIT * (1 - Tax) + D&A - CapEx - DeltaNWC
What is Levered Free Cash Flow?
Cash available to equity holders after paying interest and debt obligations.
What is the formula for Levered Free Cash Flow?
Net Income + D&A - CapEx - DeltaNWC - Debt Repayments
In M&A valuation, which FCF is usually used - unlevered or levered?
Unlevered, since it leads to Enterprise Value and avoids capital structure assumptions.
What does WACC stand for?
Weighted Average Cost of Capital
What does WACC reflect?
The average return required by both equity and debt investors, weighted by their proportion in the capital structure.
Why do we use WACC when using UFCF?
Because UFCF represents cash flows to both equity and debt holders.
Which rate do you use to discount Levered FCF?
Cost of Equity, since LFCF is only available to shareholders.
Name three inputs into calculating WACC?
Cost of Equity, Cost of Debt, Capital Structure (Equity and Debt weights)
What is the Terminal Value in a DCF?
The present value of all future cash flows beyond the forecast period.
What are the two common methods for calculating Terminal Value?
Gordon Growth Model and Exit Multiple Method
What is the Formula for Gordon Growth TV?
TV = FCF(n+1) / (WACC - g)
What’s the danger of relying only on the Exit Multiple method for Terminal Value?
It can introduce circular reasoning by assuming a future market-based value in a fundamental model.
What’s a typical perpetual growth rate used in the Gordon Growth method?
2-3%, aligned with long-term GDP / inflation.
How do you get from Enterprise Value to Equity Value?
Subtract Net Debt (Debt - Cash) and other non-operating liabilities from EV.
What is net debt?
Total debt - cash & cash equivalents.
Why is EV useful in M&A valuation?
It reflects the total value of a company, regardless of its capital structure.
What does Equity Value represent?
The portion of the company’s value attributable to shareholders.
