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The second part of my valuation series is about one of the methods under the income approach, the discounted cash flow method. In this post, I will be showing you how to create a model from scratch. This model is not meant to teach you any in-depth theory on why certain decisions are made within the DCF, but rather just give a basic understanding of all the moving parts. I also suggest you use this time to use some techniques learned in my "Stop Using Your Mouse" post.

Follow the instructions on the "Instructions" tab while building in the "Build Here" tab. I have preset the layout of the model and some of the preliminary numbers. Your job will be to take the model from 2013 through the terminal year.

This is a basic model. I realize for many of you this is extremely easy. However, some monkeys, young or old, can use this to sharpen their skillset prior to entering a BB. The ability to build this and feel comfortable moving around in the model will be very helpful in your career.

In future posts, I will go more in-depth on the actual theory behind certain variables in the model, as well as take a peek at different ways to come up with a WACC.
If anyone notices any errors in the model, please note in a comment! Thanks monkeys.
Also, if anyone has any helpful tips to add or questions, please leave a comment.

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Comments (27)

  • mhurricane's picture

    Keep them coming, this is great. Nice rudimentary model, but still comprehensive (if that makes sense).

    The difference between successful people and others is largely a habit - a controlled habit of doing every task better, faster and more efficiently.

  • PFY15's picture

    Awesome way for an inexperienced Monkey like myself to start learning these things.

  • Nefarious-'s picture

    are you creating these from scratch?

    You're born, you take shit. You get out in the world, you take more shit. You climb a little higher, you take less shit. Till one day you're up in the rarefied atmosphere and you've forgotten what shit even looks like. Welcome to the layer cake, son.

  • In reply to Nefarious-
    valuationGURU's picture

    Nefarious-:
    are you creating these from scratch?

    Yes, so hopefully no errors!!
  • frgna's picture

    Very nice - how do I post an attachment in a response? I have a little 3 statement model I could put up.

    Curious if you'll be doing an integrated IS/BS/CF model, always like to see how others do it, and/or a quick and dirty LBO.

    if you like it then you shoulda put a banana on it

  • In reply to frgna
    valuationGURU's picture

    frgna:
    Very nice - how do I post an attachment in a response? I have a little 3 statement model I could put up.

    Curious if you'll be doing an integrated IS/BS/CF model, always like to see how others do it, and/or a quick and dirty LBO.

    I am not sure how to add attachments. I can definetely show a three statement model, I unfortunately have not had a ton of time to go in-depth with these models due to work. More in-depth in the future though.

    I could also do an LBO, but I do not use LBO's professionally, so may not be the best person to speak about them.

  • UnclePanda's picture

    This is excellent work. Keep it up. Out of interest what is your background? Excuse my ignorance, but what would this be acceptable as a professional DCF in the workplace?

    Looking forward to your future posts on WACC, integrated IS/BS/CF model, and LBOs... also if you have a chance please do a NAV if you know how.

    Top work!

  • In reply to UnclePanda
    valuationGURU's picture

    UnclePanda:
    This is excellent work. Keep it up. Out of interest what is your background? Excuse my ignorance, but what would this be acceptable as a professional DCF in the workplace?

    Looking forward to your future posts on WACC, integrated IS/BS/CF model, and LBOs... also if you have a chance please do a NAV if you know how.

    Top work!

    I did a post on the asset approach already. Check it out!

  • TerpStreeter's picture

    Thanks a lot - this really helped. When would a DCF analysis be most applicable.? In other words, is there a "right situation" to use a DCF vs another valuation technique?

  • In reply to TerpStreeter
    valuationGURU's picture

    TerpStreeter:
    Thanks a lot - this really helped. When would a DCF analysis be most applicable.? In other words, is there a "right situation" to use a DCF vs another valuation technique?

    The asset approach would usually represent a floor value, because it allocates no value to the ongoing business.
    The market approach is applicable if you have representative guideline companies or transactions. DCF is great to use if you are able to come up with projections of your future operating levels.

  • jmiller0043's picture

    awesome. thank you.

  • cola1's picture
  • UnclePanda's picture

    cheers, good work on the asset model but I was more thinking of NAV resource based to do with oil and gas/ mining. Also would this be acceptable as a professional DCF in the workplace?

  • boobielover's picture

    Quick (and potentially stupid) question - how did you arrive at the long term growth rate in the terminal year?

    dollas

  • In reply to boobielover
    puntyj's picture

    The long-term growth rate is usually estimated as part of another separate analysis - one could use regression analysis for example, but there must be other ways, too. The LTGR is most likely an arbitrarily set value in this case.

    And thanks for this model. This only further proves my CF text was of top quality.

  • eleutheros's picture
  • F. Ro Jo's picture

    I want to see a damodaran vs. valguru smackdown!

  • F. Ro Jo's picture

    quick question - why only one method of valuing beyond projected period?

  • BTbanker's picture

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  • athcasi's picture