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Valuation Primer - Part Two - Discounted Cash Flow
 

valuationGURU's picture
CF
 
Points)
 on 10/7/12 at 7:00pm
Guy Typing

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.

See my other WSO blog posts

Comments

mhurricane's picture

Keep them coming, this is

 
Points)
 on 7/14/12 at 9:46pm

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

 
Points)
 on 7/14/12 at 10:52pm

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

Siberian Husky's picture

Agreed. This is great,

IB
 
Points)
 on 7/14/12 at 11:36pm

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

Nefarious-'s picture

are you creating these from

CF
(Neanderthal, 2,218
 
Points)
 on 7/15/12 at 12:37am

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

CF
 
Points)
 on 7/15/12 at 12:41am
Nefarious-:

are you creating these from scratch?

Yes, so hopefully no errors!!

See my other WSO blog posts

frgna's picture

Very nice - how do I post an

O
(King Kong, 1,016
 
Points)
 on 7/15/12 at 9:52pm

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

CF
 
Points)
 on 7/15/12 at 10:02pm
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.

See my other WSO blog posts

UnclePanda's picture

This is excellent work. Keep

 
Points)
 on 7/16/12 at 5:29am

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!

erwannabe's picture

this is EXCELLENT.

ER
(Orangutan, 273
 
Points)
 on 7/16/12 at 9:45am

this is EXCELLENT.

In reply to UnclePanda
valuationGURU's picture

UnclePanda: This is excellent

CF
 
Points)
 on 7/16/12 at 10:02am
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!

See my other WSO blog posts

TerpStreeter's picture

Thanks a lot - this really

HF
 
Points)
 on 7/16/12 at 1:18pm

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 -

CF
 
Points)
 on 7/16/12 at 1:34pm
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.

See my other WSO blog posts

jmiller0043's picture

awesome. thank you.

(Chimp, 4
 
Points)
 on 7/16/12 at 3:31pm

awesome. thank you.

cola1's picture

.

 
Points)
 on 12/12/12 at 8:24am

.

UnclePanda's picture

cheers, good work on the

 
Points)
 on 7/18/12 at 10:28am

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

(Baboon, 120
 
Points)
 on 7/18/12 at 6:00pm

dollas

avillat's picture

Nice work! Thanks!

ST
(Chimp, 11
 
Points)
 on 7/21/12 at 10:31am
In reply to boobielover
puntyj's picture

The long-term growth rate is

(Chimp, 1
 
Points)
 on 8/15/12 at 6:17pm
eleutheros's picture

Thoroughly enjoyed it.

IB
 
Points)
 on 8/24/12 at 10:53pm
F. Ro Jo's picture

I want to see a damodaran vs.

 
Points)
 on 10/7/12 at 9:27pm
F. Ro Jo's picture

quick question - why only one

 
Points)
 on 10/7/12 at 9:34pm
BTbanker's picture

Fantastic man. Might just

IB
 
Points)
 on 10/7/12 at 10:54pm

"A man generally has two reasons for doing anything. One that sounds good, and the real one." - J.P. Morgan

athcasi's picture

My excel won't open this for

 
Points)
 on 10/8/12 at 2:41pm
In reply to athcasi
valuationGURU's picture

athcasi: My excel won't open

CF
 
Points)
 on 10/8/12 at 4:36pm

See my other WSO blog posts

In reply to valuationGURU
athcasi's picture

If you wouldn't mind, I'd

 
Points)
 on 10/8/12 at 5:31pm
madridista's picture

Awesome! thank you very

O
(Chimp, 4
 
Points)
 on 10/10/12 at 5:19pm

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