Discounted Cash Flow Analysis - Best Guide To DCF Valuation

5/17/2019 Discounted Cash Flow Analysis | Best Guide to DCF Valuation
Discounted Cash Flow Analysis (DCF

(https://www.wallstreetmoj
o.com/)
methods/)
Valuation)
Valuation
Analyst
(https://www.
 wallstreetmojo.
 (https://www.wallstreetmojo.com/dcf-discounted-cash- ow-
com/valuation-
formula/)
analyst/)
 (https://www.wallstreetmojo.com/gordon-growth-model-
Top 10 formula/)
Qualitative
Factors in
Valuation Tutorials
Valuation
(https://www.
 wallstreetmojo.
com/qualitative
-factors-
valuation/)
7 Best
Valuation
Books
In this Discounted Cash Flow Valuation Analysis Guide, we discuss
(https://www.
the following –
 wallstreetmojo.
com/best-
What is Discounted Cash Flows Valuation
valuation-
Discounted Cash Flow Valuation Analogy
books/)
Step by Step Discounted Cash Flow Approach
DCF Step #1 – Projections of the Financial Statements
https://www.wallstreetmojo.com/dcf-discounted-cash-flow/ 1/32
DCF Step #2 – Calculating the Free Cash Flow to Firms
(https://www.wallstreetmoj DCF Step #3 – Calculating the Discount Rate
o.com/) DCF Step #4 – Calculating the Terminal Value

methods/) DCF Step #5 – Present Value Calculations
Valuation DCF Step #6 – Adjustments
Analyst DCF Step #7 – Sensitivity Analysis
(https://www. Conclusion
 wallstreetmojo.
com/valuation-
analyst/) What is Discounted Cash Flow

Top 10
Valuation?
Qualitative
Factors in
Valuation Tutorials
Valuation
(https://www.
“
In simple words, Discounted Cash Flow or DCF analysis is a process of evaluating th
attractiveness
 wallstreetmojo. of an investment opportunity in the future at present. As such, discount
cash ow valuation analysis tries to calculate the value of a company today, based o
com/qualitative
-factors- forecasts of how much money the company is going to make in the future.
valuation/)
7 Best
Valuation In other words, DCF analysis uses the forecasted free cash ows of a
Books
company and discount them back so as to arrive at the present value
(https://www.
estimate (https://www.wallstreetmojo.com/present-value-factor-pv/),
 wallstreetmojo.
which forms the basis for the potential investment now.
com/best-
valuation-
books/)
Discounted Cash Flow Valuation
Analogy
Let us take a simple discounted cash ow example. If you have an
(https://www.wallstreetmojoption between receiving $100 today and obtaining $100 in a year

o.com/) time. Which one will you take?
methods/)
Here the chances are more than you will consider taking the money
Valuation
Analyst now because you can invest that $100 today and earn more than
(https://www. $100 in the next twelve months’ time. Obviously, you considered the
 wallstreetmojo. money today because the money available today is worth more than
com/valuation- the money in the future due to its potential earning capacity (time
analyst/) value of money concept (https://www.wallstreetmojo.com/time-
value-money/))
Top 10
Qualitative
Now, apply the same calculation for all the cash you expect a
Factors in
Valuation Tutorials company to be producing in the future and discount it to arrive the
Valuation
net present value and you can have a good understanding of the
(https://www.
 wallstreetmojo. company’s value.
com/qualitative
The thumb rule states that if the value reached through
-factors-
discounted cash ow analysis is higher than the current cost of
valuation/)
the investment, the opportunity would be attractive.
7 Best
Please note that DCF analysis entails you to think through
Valuation
various factors that affect a rm likes of future revenue growth
Books
and pro t margins, cost of equity and debt and a discount rate
(https://www.
that largely depends on the risk-free rate
 wallstreetmojo.
(https://www.wallstreetmojo.com/risk-free-rate/). All of these
com/best-
valuation-
factors drive the share value and thus enable the analysts to
books/)
put a more realistic price tag on the company’s stock.
A i h d d hi i l DCF l ill
Assuming that you understood this simple DCF example, we will

now move the practical Discounted Cash Flow Example of Alibaba
o.com/) IPO (https://www.wallstreetmojo.com/de nite-guide-to-alibaba-ipo-
methods/) nancial-and-valuation-model/)
Valuation
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Books
(https://www. Step by Step Discounted Cash Flow

 wallstreetmojo. Analysis
com/best-
valuation-
As a professional Investment Banker or an Equity Research Analyst
books/)
(https://www.wallstreetmojo.com/equity-research/), you are expected
to perform DCF comprehensively. Below is step by step appraoch of
Discounted Cash Flow Analysis (as done by professionals).
o.com/)
methods/)
Valuation
Analyst
(https://www.
 wallstreetmojo.
com/valuation-
analyst/)
Top 10
Qualitative
Factors in
Valuation Tutorials
Valuation
(https://www.
 wallstreetmojo.
Here are the seven steps to Discounted Cash Flow Analysis –
com/qualitative
-factors- #1 – Projections of the Financial Statements

valuation/) #2 – Calculating the Free Cash Flow to Firms
#3 – Calculating the Discount Rate

7 Best
#4 – Calculating the Terminal Value
Valuation
Books #5 – Present Value Calculations
(https://www. #6 – Adjustments
#7 – Sensitivity Analysis
 wallstreetmojo.
com/best-
valuation-
books/)
DCF Step #1 – Projections of the
Financial Statements
The rst thing that needs your attention while applying discounted
(https://www.wallstreetmojcash ow analysis is to determine the forecasting period as rms,

o.com/) unlike human beings, have in nite lives. Therefore, the analysts’ have
methods/)
to decide how far they should project its cash ow in the future. Well,
Valuation the analysts’ forecasting period depends on the stages the company
Analyst is operating such as early to business, high growth rate, stable
(https://www. growth rate and perpetuity growth rate.
 wallstreetmojo.
com/valuation-
analyst/)
Top 10
Qualitative
Factors in
Valuation Tutorials
Valuation
(https://www.
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-factors-
valuation/)
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Books
IMPORTANT – Do have a look at this step by step guide to Financial
(https://www.
Modeling in Excel (https://www.wallstreetmojo.com/free- nancial-
 wallstreetmojo.
modeling-training-course/)
com/best-
valuation-
The forecasting period plays a critical role because small rms grow
books/)
faster than the more mature rms and thus carry higher growth rate.
So, the analysts’ do not expect the rms to have in nite lives due to
the fact that the small rms are more open to acquisition and
(https://www.wallstreetmojbankruptcy than the larger ones. he thumb rule says that DCF
o.com/) analysis is widely used during the estimated excess return period of a
methods/) rm in the future. In other words, a company that stops covering its
Valuation costs through investments or fails to generate pro ts you need not
Analyst perform DCF analysis for the next ve years or so.
(https://www.
Forecasting is done professionally using Financial Modeling
 wallstreetmojo.
com/valuation- (https://www.wallstreetmojo.com/ nancial-modeling/). Here you
analyst/) prepare a three statement model along with all the supporting
schedules like the depreciation
Top 10
(https://www.wallstreetmojo.com/depreciation/) schedule, working
Qualitative
capital (https://www.wallstreetmojo.com/working-capital-ratio-
Factors in
Valuation Tutorials formula-management- nancing/) schedule, intangibles
Valuation
(https://www.wallstreetmojo.com/amortization-of-intangible-assets/)
(https://www.
 wallstreetmojo. schedule, shareholder’s equity
com/qualitative (https://www.wallstreetmojo.com/shareholders-equity/) schedule,
-factors- other long term items schedule, debt schedule etc.

valuation/)
7 Best Projecting the Income Statement

Valuation Here the analysts have to forecast the sales or revenue growth
Books over the next ve years, considering that the company will be
(https://www.
producing excess return in the next ve years. After that, the
 wallstreetmojo. analysts calculate after-tax operating pro ts and at the same
com/best-
time estimate the expected capital expenditure and increase in
valuation-
net working capital over the forecasted period
books/)
(https://www.wallstreetmojo.com/capital-expenditure-capex/).
Thus, the top line growth or revenue growth becomes the most
important assumption in Discounted Cash Flows that the
(https://www.wallstreetmoj analysts’ make about the company’s future cash ows.

o.com/) Therefore, forecasting top-line growth we need to take into
methods/) consideration a wide variety of aspects likes of historical
Valuation revenue growth of the company, growth rate of the industry the
Analyst company is operating in and growth of the economy or GDP.
(https://www. Many analysts call it top to bottom growth rate, wherein they
 wallstreetmojo. rst look at the growth of economy, then the industry and at
com/valuation- last the company.
analyst/) However, there is another approach called internal growth rate
Top 10 that comprises of return on the equity
Qualitative (https://www.wallstreetmojo.com/internal-growth-rate-
Factors in formula/) and growth in retained earnings

Valuation Tutorials
Valuation (https://www.wallstreetmojo.com/retained-earnings/). Thus, we
(https://www. will take a combined growth rate, comprising of both the top to
 wallstreetmojo.
bottom growth rate and internal growth rate so as to forecast
com/qualitative future revenue
-factors-
valuation/)
7 Best
Valuation
Books
(https://www.
 wallstreetmojo.
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valuation-
books/)
o.com/)
methods/)
Valuation
Analyst
(https://www.
 wallstreetmojo. Projecting the Balance Sheet

com/valuation-
Forecasting the nancial statements is not done in sequence in
analyst/)
Discounted Cash Flows. All the three statements are
Top 10 interconnected and you will nd that while you forecast from
Qualitative
the Income Statement
Factors in
(https://www.wallstreetmojo.com/income-statement/), you may
Valuation Tutorials
Valuation
have to move to the Balance Sheet
(https://www.
(https://www.wallstreetmojo.com/balance-sheet/) and then to
 wallstreetmojo.
the Cash Flows (https://www.wallstreetmojo.com/cash- ow-
com/qualitative
analysis/) etc.
-factors-
Below is the snapshot of Alibaba Balance Sheet forecasts
valuation/)
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Valuation
Books
(https://www.
 wallstreetmojo.
com/best-
valuation-
books/)
o.com/)
methods/)
Valuation
Analyst
(https://www.
Projecting the Cash Flow Statements
 wallstreetmojo. It is not necessary for you to project each and every item on the
com/valuation- Cash Flow Statements. Sometimes it becomes practically
analyst/) impossible to do so due to lack of data.
Top 10 Here only the necessary items from Discounted Cash Flow
Qualitative valuation point of view are forecasted.
Factors in
Valuation
(https://www.
 wallstreetmojo.
com/qualitative
-factors-
valuation/)
7 Best
Valuation
Books
(https://www.
 wallstreetmojo.
com/best-
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books/)
DCF Step #2 – Calculating Free Cash
Flow to Firm
The second step in Discounted Cash Flow Analysis is to calculate the
(https://www.wallstreetmojFree Cash Flow to Firm.

o.com/)
methods/)
Valuation
Analyst
(https://www.
 wallstreetmojo.
com/valuation-
analyst/)
Top 10
Qualitative
Factors in
Valuation
(https://www.
 wallstreetmojo.
com/qualitative
Before we estimate future free cash ow, we have to rst understand
-factors-
what free cash ow is. Free cash ow is the cash, which is left out
valuation/)
after the company pays all of the operating expenditure and required
7 Best capital expenditure. The company uses this free cash ow to enhance
Valuation
its growth such as developing new `products, establishing new
Books
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Equity Research Course
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Free cash ow re ects the rm’s ability to generate money out of its
Valuation
business, strengthening the nancial exibility that it can potentially
Books
use to pay its outstanding net debt
(https://www.
(https://www.wallstreetmojo.com/net-debt-formula/) and increase
 wallstreetmojo.
value for shareholders.
com/best-
valuation-
Free Cash Flow to Firm Formula
books/)
(https://www.wallstreetmojo.com/free-cash- ow- rm-fcff/) is as
follows –
Free Cash Flow to Firm or FCFF Calculation = EBIT x (1-tax rate) +

Non Cash Charges + Changes in Working capital – Capital
o.com/)
methods/) Expenditure
Valuation
Formula Comments
Analyst
(https://www. Flow to total capital, Removes

EBIT x (1-tax rate)
 wallstreetmojo. capitalization effects on earnings
com/valuation-
Add back all noncash charges
analyst/)
(https://www.wallstreetmojo.com
Add: Non Cash Charges
Top 10 /non-cash-expense/) like
Qualitative
Depreciation, Amortization
Factors in
Valuation Can be out ow or in ow of cash.
(https://www. Watch for large swings year-to-

 wallstreetmojo. year in forecasted working
Add: Changes in working capital
com/qualitative capital
-factors- (https://www.wallstreetmojo.com
valuation/) /working-capital-formula/)
7 Best Critical to determining CapEx

Valuation
Less: Capital expenditure levels required to support sales
Books
and margins in forecast
(https://www.
 wallstreetmojo.
com/best-
valuation-
After projecting the nancials of Alibaba, you can link the individual
books/)
items as given below to nd the Free Cash Flow Projections of
Alibaba
o.com/)
methods/)
Valuation
Analyst Having estimated the free cash ows for the next ve years, we have
(https://www. to gure out the worth of these cash ows in the present time.
 wallstreetmojo. However, to get to know the present value of these future cash ow,
com/valuation- we would require a discount rate that can be used to determine the
analyst/) net present value or NPV of these future cash ow.
Top 10
Qualitative
DCF Step 3- Calculating the
Factors in
Discount Rate
Valuation
(https://www. The third step in Discounted Cash Flow valuation Analysis is to

 wallstreetmojo. calculate the Discount Rate.
com/qualitative
-factors-
valuation/)
7 Best
Valuation
Books
(https://www.
 wallstreetmojo.
com/best-
valuation-
books/)
o.com/)
methods/)
Valuation
Analyst
(https://www.
 wallstreetmojo.
com/valuation-
analyst/)
Top 10 A number of methods are being used to calculate the discount rate.
Qualitative But, the most appropriate method to determine the discount rate is to
Factors in
apply the concept of weighted average cost of capital, known as
Valuation
WACC. However, you have to keep in mind that you have taken the
(https://www.
right gures of equity and after-tax cost of debt as the difference of
 wallstreetmojo.
just one or two percentage point in the cost of capital will make a
com/qualitative
vast difference in the fair value of the company. Now, let us nd out
-factors-
how the cost of equity and debt are determined.
valuation/)
7 Best
Cost of Equity
Valuation
Books Unlike the debt portion that pays a set rate of interest, Equity does
(https://www. not have an actual price that it pays to the investors. However, it
 wallstreetmojo.
doesn’t mean that equity doesn’t bear a cost. We know that the
com/best- shareholders expect the company to deliver absolute returns on their
valuation-
investment in the company. Thus, from the rm’s viewpoint, the
books/)
required rate of return from the investors is the cost of equity
because if the company fails to deliver the required rate of return
then the shareholders will sell their positions in the company. This, in
(https://www.wallstreetmojturn, will hurt the share price movement in the stock market.
o.com/)
methods/) The most common method to calculate the cost of capital is to apply
the capital asset pricing model or (CAPM)
Valuation
(https://www.wallstreetmojo.com/capm-beta-de nition-formula-
Analyst
calculate-beta-in-excel/). As per this method, the cost of equity
(https://www.
would be (Re)= Rf + Beta (Rm-Rf).
 wallstreetmojo.
com/valuation-
Where;
analyst/)
Top 10 Re= Cost of equity (https://www.wallstreetmojo.com/cost-of-
Qualitative equity-capm/)
Factors in RF= Risk-Free rate
Valuation Β = Beta
(https://www. Rm= Market Rate
 wallstreetmojo.
com/qualitative
-factors-
Cost of Debt
valuation/) Cost of debt is easy to calculate as compared to the cost of equity
(https://www.wallstreetmojo.com/cost-of-equity-formula/). The rate
7 Best
implied to determine the cost of debt is the current market rate that
Valuation
the company pays on its current debt.
Books
(https://www.
For the sake of simplicity in the context of the discussion, I have
 wallstreetmojo.
taken the WACC gures directly as 9%.
com/best-
valuation-
books/)
IMPORTANT – You can refer to my detailed Weighted average cost
(https://www.wallstreetmojof capital guide (https://www.wallstreetmojo.com/weighted-average-

o.com/) cost-capital-wacc/) wherein I have discussed how to calculate this
methods/)
professionally with multiple examples including that of Starbucks
Valuation WACC.
Analyst
(https://www.
 wallstreetmojo.
DCF Step 4 – Calculating the
com/valuation- Terminal Value
analyst/)
The fourth step in Discounted Cash Flow Analysis is to calculate
Top 10 the Terminal Value
Qualitative
Factors in
Valuation
(https://www.
 wallstreetmojo.
com/qualitative
-factors-
valuation/)
7 Best
Valuation
Books
(https://www.
 wallstreetmojo.
com/best-
valuation-
We have already calculated the critical components of DCF analysis,
books/)
except terminal value. Therefore, we will now calculate the terminal
value followed by calculation of the discounted cash ow analysis.
There are several ways to calculate the terminal value of cash ows.
However, the most commonly known method is to apply a perpetuity
o.com/)
methods/) method using the Gordon Growth Model
(https://www.wallstreetmojo.com/gordon-growth-model/) to value
Valuation
the company. The formula to calculate the terminal value
Analyst
(https://www.wallstreetmojo.com/terminal-value-formula-method-
(https://www.
calculations-in-excel/) for future cash ow is:
 wallstreetmojo.
com/valuation-
Terminal Value = Final year projected cash ow * (1+ In nite
analyst/)
growth rate)/ (Discount rate-Long term cash ow growth rate)
Top 10
Qualitative
Factors in
Valuation
(https://www.
 wallstreetmojo.
com/qualitative
-factors-
valuation/)
7 Best
Valuation DCF Step 5 – Present Value

Books Calculations
(https://www.
The fth step in Discounted Cash Flow Analysis is to nd the present
 wallstreetmojo.
values of free cash ows to rm and terminal value.
com/best-
valuation-
books/)
o.com/)
methods/)
Valuation
Analyst
(https://www.
 wallstreetmojo.
com/valuation-
analyst/)
Top 10 Find the present value of the projected cash ows using NPV
Qualitative formulas (https://www.wallstreetmojo.com/npv-in-excel/) and XNPV
Factors in
formulas (https://www.wallstreetmojo.com/npv-vs-xnpv/).
Valuation
(https://www. Projected cash ows of the rm are divided into two parts –
 wallstreetmojo.
com/qualitative Explicit Period (period for which FCFF was calculated – till
-factors- 2022E)
valuation/) Period after the explicit period (post 2022E)
7 Best
Valuation
Books
(https://www.
 wallstreetmojo.
com/best-
valuation-
books/)
o.com/)
methods/)
Valuation
Analyst
Present Value of Explicit Forecast Period
(https://www. (year 2022)
 wallstreetmojo.
Calculate the Present Value of the Explicit Cash Flows using WACC
com/valuation-
derived above
analyst/)
Top 10
Qualitative
Factors in
Valuation
(https://www. Present Value of Terminal Value (beyond

 wallstreetmojo. 2022)
com/qualitative
-factors-
valuation/)
7 Best
Valuation
Books DCF Step 6- Adjustments

(https://www.
The sixth step in Discounted Cash Flow Analysis is to make
 wallstreetmojo. adjustments to your enterprise valuation.
com/best-
valuation-
books/)
o.com/)
methods/)
Valuation
Analyst
(https://www.
 wallstreetmojo.
com/valuation-
analyst/)
Top 10 Adjustments to the Discounted Cash Flow valuations is done for all
Qualitative the non-core assets and liabilities that have not been accounted for in
Factors in
the Free Cash Flow Projections. Valuation may be adjusted by adding
Valuation
unusual assets or subtracting liabilities to nd the adjusted fair equity
(https://www.
value (https://www.wallstreetmojo.com/equity-value/).
 wallstreetmojo.
com/qualitative Common Discounted Cash Flow Valuation Adjustments Include –

-factors-
valuation/)
7 Best
Valuation
Books
(https://www.
 wallstreetmojo.
com/best-
valuation-
books/) Adjustments to DCF

Items
(Discounted Cash Flows)
Net Debt (Total Debt Cash) Market Value
Net Debt (Total Debt – Cash) Market Value
(https://www.wallstreetmojUnderfunded/overfunded pension
Market Value
o.com/) liabilities
methods/)
Environmental Liabilities Based on company reports
Valuation
Analyst
Operating Lease Liabilities
(https://www. (https://www.wallstreetmojo.com/ nan Estimated Value
 wallstreetmojo. cial-lease-vs-operating-lease/)
com/valuation-
Minority Interest
analyst/) Market Value or Estimated
(https://www.wallstreetmojo.com/minor
Value
Top 10 ity-interest-guide-examples/)
Qualitative
Market Value or Estimated
Factors in Investments
Value
Valuation
(https://www. Market Value or Estimated

 wallstreetmojo. Associates
Value
com/qualitative
-factors-
valuation/) Adjust your valuation for all assets and liabilities, for example, non-
core assets and liabilities, not accounted for in cash ow projections.
7 Best
The enterprise value may need to be adjusted by adding other
Valuation
unusual assets or subtracting liabilities to re ect the company’s fair
Books
value. These adjustments include:
(https://www.
 wallstreetmojo.
DCF Valuation Summary
com/best-
valuation-
books/)
o.com/)
methods/)
Valuation
Analyst DCF Step 7 – Sensitivity Analysis

(https://www.
The seventh step in Discounted Cash Flow Analysis is to calculate
 wallstreetmojo.
the perform sensitivity analysis of the output
com/valuation-
analyst/)
Top 10
Qualitative
Factors in
Valuation
(https://www.
 wallstreetmojo.
com/qualitative
-factors-
valuation/)
7 Best
Valuation
Books
(https://www.
 wallstreetmojo.
com/best-
valuation-
It is important to test your DCF model with the changes in
books/)
assumptions. Two of the most important assumptions that have a
major impact on valuations are as follows
Changes in the In nite Growth Rate

Changes in Weighted Average Cost of Capital
o.com/)
methods/)
We can easily do with Sensitivity Analysis in excel using DATA
Valuation
TABLEs (https://www.wallstreetmojo.com/sensitivity-analysis-in-
Analyst
excel/)
(https://www.
 wallstreetmojo.
Below chart shows the sensitivity analysis of Alibaba’s DCF
com/valuation-
Valuation Model.
analyst/)
Top 10
Qualitative
Factors in
Valuation
(https://www.
 wallstreetmojo.
We note that the base case valuation of Alibaba is at $78.3 per
com/qualitative
share.
-factors-
When WACC changes from 9% to say 11%, then the DCF
valuation/)
valuation decreases to $57.7
7 Best Likewise, if we change the in nite growth rates from 3% to 5%,
Valuation
then the fair DCF valuation becomes $106.5
Books
(https://www.
 wallstreetmojo. Conclusion
com/best-
valuation-
Now we have come to know that Discounted Cash Flow Analysis
books/)
helps to calculate the value of the company today based on the
future cash ow. It is because the value of the company depends
upon the sum of the cash ow that the company produces in the
(https://www.wallstreetmojfuture. However, we have to discount these future cash ows to

o.com/) arrive at the present value of these cash ows.
methods/)
Valuation
Discounted Cash Flow Analysis (DCF
Analyst
Valuation) Video
(https://www.
 wallstreetmojo.
Discounted Cash Flow (DCF) Analysis | Step by Ste…
Ste…
com/valuation-
analyst/)
Top 10
Qualitative
Factors in
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Discounted Cash Flow Analysis - Best Guide To DCF Valuation

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5/17/2019 Discounted Cash Flow Analysis | Best Guide to DCF Valuation

Discounted Cash Flow Analysis (DCF

DCF Step #2 – Calculating the Free Cash Flow to Firms

(https://www.wallstreetmoj DCF Step #3 – Calculating the Discount Rate

o.com/) DCF Step #4 – Calculating the Terminal Value

Valuation DCF Step #6 – Adjustments

Analyst DCF Step #7 – Sensitivity Analysis

analyst/) What is Discounted Cash Flow

Let us take a simple discounted cash ow example. If you have an

(https://www.wallstreetmojoption between receiving $100 today and obtaining $100 in a year

Assuming that you understood this simple DCF example, we will

Analyst Start Your Free Investment Banking Course

 wallstreetmojo. Video Tutorials

analyst/) Recommended Courses

Qualitative Financial Analyst Training Bundle

(https://www. Step by Step Discounted Cash Flow

to perform DCF comprehensively. Below is step by step appraoch of

Discounted Cash Flow Analysis (as done by professionals).

-factors- #1 – Projections of the Financial Statements

#3 – Calculating the Discount Rate

Books #5 – Present Value Calculations

(https://www.wallstreetmojcash ow analysis is to determine the forecasting period as rms,

Analyst perform DCF analysis for the next ve years or so.

com/valuation- (https://www.wallstreetmojo.com/ nancial-modeling/). Here you

-factors- other long term items schedule, debt schedule etc.

7 Best Projecting the Income Statement

important assumption in Discounted Cash Flows that the

(https://www.wallstreetmoj analysts’ make about the company’s future cash ows.

Analyst company is operating in and growth of the economy or GDP.

Top 10 that comprises of return on the equity

Factors in formula/) and growth in retained earnings

 wallstreetmojo. Projecting the Balance Sheet

Qualitative valuation point of view are forecasted.

The second step in Discounted Cash Flow Analysis is to calculate the

(https://www.wallstreetmojFree Cash Flow to Firm.

(https://www. ₹8999 ₹24999

Top 10 Related Courses

com/qualitative M&A Course (https://www.wallstreetmojo.com/mergers-and-

Free Cash Flow to Firm or FCFF Calculation = EBIT x (1-tax rate) +

(https://www. Flow to total capital, Removes

Valuation Can be out ow or in ow of cash.

(https://www. Watch for large swings year-to-

7 Best Critical to determining CapEx

(https://www. The third step in Discounted Cash Flow valuation Analysis is to

Top 10 Re= Cost of equity (https://www.wallstreetmojo.com/cost-of-

IMPORTANT – You can refer to my detailed Weighted average cost

(https://www.wallstreetmojof capital guide (https://www.wallstreetmojo.com/weighted-average-

Top 10 the Terminal Value

Valuation DCF Step 5 – Present Value

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Books DCF Step 6- Adjustments

com/qualitative Common Discounted Cash Flow Valuation Adjustments Include –

books/) Adjustments to DCF

Net Debt (Total Debt Cash) Market Value

Net Debt (Total Debt – Cash) Market Value

(https://www. (https://www.wallstreetmojo.com/ nan Estimated Value

(https://www. Market Value or Estimated

Analyst DCF Step 7 – Sensitivity Analysis

Changes in the In nite Growth Rate

future cash ow. It is because the value of the company depends

(https://www.wallstreetmojfuture. However, we have to discount these future cash ows to

NPV Formula in Excel (https://www.wallstreetmojo.com/npv-

analyst/) Free Cash Flow Calculator