10/7/12

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.

Comments (27)

7/14/12

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.

7/14/12

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

7/14/12

Agreed. This is great, especially when used along with IB by Rosenbaum and Pearl.

7/15/12

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-
7/15/12
Nefarious-:

are you creating these from scratch?

Yes, so hopefully no errors!!

7/15/12

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
7/15/12
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.

7/16/12

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!

7/16/12
In reply to UnclePanda
7/16/12
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!

7/16/12

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
7/16/12
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.

7/16/12
7/18/12

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?

7/18/12

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

dollas

7/21/12

Nice work! Thanks!

In reply to boobielover
8/15/12

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.

8/24/12

Thoroughly enjoyed it.

10/7/12

I want to see a damodaran vs. valguru smackdown!

10/7/12

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

10/7/12

Fantastic man.

Might just want to mention to them how to get the terminal growth rate (ROE*(1-Div Payout Ratio).

10/8/12

My excel won't open this for some reason; it reads

"Excel found unreadable content in 'DCF-BASICS.xls'. Do you want to recover the contents of this workbook?"

I enter yes, and it comes up "Unable to read file."

Then "The workbook cannot be opened or repaired by Microsoft Excel because it is corrupt".

I'm using Excel 2007, so I checked if I could open other old xls files and it could, so I'm not sure what is going on. Any help?

In reply to athcasi
10/8/12
athcasi:

My excel won't open this for some reason; it reads

"Excel found unreadable content in 'DCF-BASICS.xls'. Do you want to recover the contents of this workbook?"

I enter yes, and it comes up "Unable to read file."

Then "The workbook cannot be opened or repaired by Microsoft Excel because it is corrupt".

I'm using Excel 2007, so I checked if I could open other old xls files and it could, so I'm not sure what is going on. Any help?

No idea. Anyone else know? I can save in xls or xlsx and PM you, let me know

In reply to valuationGURU
10/8/12

If you wouldn't mind, I'd really appreciate it if you could PM me an xlsx version.

10/10/12

Awesome! thank you very much...time to start learning

12/12/12

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