DCF Valuation Method
I have learned the rough steps of how to do a DCF analysis, but understand that prof. Damodaran has his own website with links to various DCFs on excel. I don't understand why someone/or a BB firm would take the time to create their own valuation models when they have the best valuation teachers at their fingertips. Just curious to know why its so important to know the details of DCF? Wouldn't your firm give you the models in excel and you just input the numbers into it? Just want to get a better understanding of what an intern would do at a BB relating to valuation models. Thanks.
Intellectual exercise. I'd rather have a group of analysts understand the flow of valuation than be a robot to it's computation, building models from the ground up is one of the best intellectual exercises you can do for yourself..
Every company is different. For example, when I value my company for our investors (comps to generate proper unlevered betas, cost of capital, and exit multiples. Something that is not intuitive with any baseline DCF model.
This is contradictory to your "best valuation teachers" question. Don't contradict your flow of logic and create dichotomies...
Ok that makes sense. Thanks a lot for the response. As far as a general rule for predicting FCF what do you use? Would taking the 3 year average, projecting it another 3 years and then cutting it in half for the next 2 years, then using LT inflation rate for the terminal value work? Or is this too simplistic? Just want to find a conservative FCF method to work across all industries. Thanks.
Yeah, I don't think you understand the work around of a DCF. You can't apply some universal FCF method to midstream O&G and then to biotechnology, etc... Granular detail will always be required, it's too simplistic, and applying some inflation rate to a growing EBITDA as a % of revenue could undercut a lot of your TV as a % of EV.
Ok, yeah that's what I thought. I guess I just don't understand how to project revenue and FCF growth then.
DCF Valuation question (Originally Posted: 08/19/2013)
Hi everyone,
Just got a quick question regarding the FCF calculations used in DCF. The most common way is using EBIT(1-tax) + Amortization & Depreciation - Change in Working Capital - Capital Expenditures, however another slightly more complicated way of arriving at the FCF is using NOPLAT - Net Investment. I was wondering if anyone has any insight into what are the advantages/disadvantages of each approach from a company valuation perspective?
noplat is basically ebit*(1-t)
From my understanding NOPLAT is similar to NPAT(ebit*(1-t) however it also makes a bunch of adjustments to taxes. However what I dont understand is what is the advantage of calculating FCF based on second method given the extra complexities in determining NOPLAT and net investments. Surely it must yield some extra sort of insight that is not avaliable from the traditional method we use.
Perhaps it provides a more refined output (FCF) the more detail you dig into for taxes? Is it worth the extra time/hassle? Probably not.
It is essentially the same thing as the poster above stated. Never used anything other than EBIT/Op Inc.
DCF valuation question (Originally Posted: 01/03/2010)
when discounting FCFF and FCFE we are getting the present value of operation costs. We need to add to it cash and marketable securities +other modification to get the value of the firm. My question is about the income from your marketable securities. the return that you get should be excluded from the NI calculations when you want to use teh FCFE analysis. Right?
yes because they represent a "fair" return for their risk...
... i think. That's what I remember from Damodaran's Investment Valuation. You should check out his website; he basically puts everything he knows on there so you don't have to buy any of his books.
http://pages.stern.nyu.edu/~adamodar/
I think you can also think of it this way: assume the market accurately prices the marketable securities (ie their worth is the present value of their future cash flows). Then save yourself the time and the trouble by valuing the firm w/o the securities income and then adding the value of the securities on to the DCF
thanks
Cssh Flow Projection (DCF valuation model) (Originally Posted: 10/23/2011)
Hi,
I am wondering what's the best way to find growth driver (growth rate) of revenue and cost in a DCF model.
In practice, how investment bankers determine revenue growth rate? Cost seems to be relatively straightforward. I suspect growth rate and the way to project it will be different industry by industry. What is the best practice in general?
In addition, I am specifically looking at airline industry and wondering how to forecast revenue and costs in an airliner. Any thought will be very welcomed.
Thank you so much in advance.
In practice... investment bankers use equity research reports to tell them what growth rate assumptions to use.
In theory... you'd use historical rates (assuming they're still relevant) and adjust for macroeconomic events, the stage the company's in (growth, mature, etc.), growth/fall in demand, etc.
you grow revs at whatever your MD tells you to grow them at to derive the highest valuation
Thank you.
Projections for DCF valuation...help! (Originally Posted: 02/18/2010)
I need to do a DCF valuation for whole foods for a school project. I have all historical fin statements etc. I projected revenue for ten years into the future and came up with a terminal value as a perpetuity of nominal rate projected economic growth. Im stuck and still only on projections for the I/S. I cant figure out what to project for interest expense, I know it is correlated to LT debt and cost of debt, but how do u forecoast debt into the future. How do you forecast nonoperating revenue, A/R, A/P for bal sheet. Im just lost any help would be much appreciated
For the interest expense, you look up the debt schedule and see how it is being paid off every year (which affects the projection of Liabilities in the BS). Then for every remaining debt tranche, however large or small it is, each year you take the interest expense. These interest expenses for all the tranches then are added up and appear on the IS.
To sum up: In order to project the interest expense, you need to have an idea of how the debt is being paid off and how much of it will be remaining each year. For the remaining debt (and different tranches of it) each year you take the interest expense.
A/R and A/P you can project from the % of say, sales, that they represent in the last year with actual data (not projected,) given that it didn't change much from the previous years.
Good luck.
Using Relative Valuation + DCF (Originally Posted: 05/22/2014)
Does anyone have any insight on making a weighted average of relative valuations + DCF valuations to determine the intrinsic value?
Cons?
Something like the attached picture:
Intrinsic Value tends to be derived from a DCF. Relative would be comparables, like P/E, P/B or EV/EBITDA.
Is the question: are the above weightings correct for a valuation?
I'm not in equity research but for I Banking, (FIG) I typically use 50 - 60% for (DCF, Residual Income, and sometimes DDM),
20-25% for comps and 20-25% weighting for precedent transactions.
Hope that helps
Help with DCF/Multiples Valuation! (Originally Posted: 03/09/2010)
Hey guys, I need some advice on whether to use DCF or multiples for evaluating a part of a conglomerate
So, Im in senior undergrad guy, recently being assigned to a case in my finance class to do some M&A work, but given the limited info, the traditional DCF models seems a bit hard to apply.
I've been given the selected data of the target firm, have all the info up to Operating Profit or (EBIT) on the Income statement. given details of Assets but only given current liabilities, mentions nothing about long term and equities.
The conventional path of DCF is to calculate the FCF+terminal value of FCF and discount it by WACC--> to get the enterprise value, and take away market value of debt to get the value of the equity.
This is puzzling because I don't know how much interest they are paying, and how much debt they have on their B/S, so im not exactly sure how to apply the DCF. Given the target firm is actually a part of a conglomerate, how would I adjust the DCF if possible?
Also given lots of info of a public comparable firm, which strongly hints that maybe I should at least consider the multiples valuation?
Is there anyway to apply DCF if I don't even know how much debt this division has? or am is there something different about valuating a division of a conglomerate?
Thankx for any advice!
yup, so u take a set of comparable companies similar to that division and get the min, max, median ebitda multiples
then take the ebitda for your division and multiply it to those multiples. that should give u the EV of your company.
DCF Valuation - Independent oil and gas companies (Originally Posted: 12/28/2009)
I am a reservoir engineer and my boss explained to me that all independent oil and gas companies utilize before tax calculations in their valuations of properties, acquisitions, etc... and I was wondering if this is specific to oil and gas or all investment decisions from multiple industries? Also why do you not take into account the tax burden for certain investments? It seems that by not taking taxes into account you would bid too much and thus make a lower profit (ROR) for shareholders and debtors or is there a additional discounting premium introduced to take into account taxes? Thank you!!!
at the risk of being harpooned by the NY BB intelligencia, when I advise clients on potential corporate transactions (MM M&A) we base DCF on EBITDA to try to gauge the available free cash flow to support debt, as well as to aid in comparing multiple targets. as part of this, we evaluate various target alternatives on a pre-tax basis because the applicable tax rate is dependent on numerous factors, many of which can be manipulated during the transaction and structuring. for example, if the target is a "S" corp or a LLC (and you elect either partnership treatment or disregarded entity status with the IRS - and yes, I know you don't "elect" to be a disregarded entity), you could very well have "pass through" tax whereby the applicable tax rate is dependent on the circumstances of the owner. alternatively, in a "C" corp setting, between NOLs, 338 elections and special depreciation provisions in the IRC ("bonus" and 179 depreciation) the tax implications vary widely between each target under analysis. therefore, in order to compare each option on a "apples to apples" basis, we ignore the tax side during the DCF analysis (and then adjust as appropriate on the back end when evaluating transaction value, which can change radically if stock/assets/368 reorg's).
Also has to do with where these transactions take place. Lots of Nat Res / MM transactions are cross border - tons of legal crap go into it. Best to do it clean and readjust later as reformedatty explained
DCF Valuation and market value of companies (Originally Posted: 03/04/2011)
Hi guys,
I am doing some research on the relationship between the DCF valuation of a company (when done right, using reasonably appropriate inputs) and the current market value of a company.
Basically i want to know if there is a significant difference between what the market says a company is worth, and what a DCF approach says a company is worth.
I am writing this for my Masters' dissertation and i would like to get the input of more experienced finance professionals on the reasonableness of this topic.
Thanks.
You might want to consider writing your masters dissertation on something more original...
I agree. However i am examining this from a 3rd world [erspective. There hasn't been that much research done on the use of DCF valuation for African companies, and i thought it might be an interesting topic.
It isn't set in stone. My supervisor may decide its been done way too many times and help guide me to more original topics. For now though, this is what i got.
It's called a market implied discount rate.
Unless you can tell the future, you don't have access to the correct rates and information to get a perfect valuation to compare the market with
That's an impossible question to answer. Everything is about your inputs on the DCF (along with every other type of model you use), hence why so many different analysts and firms have different recommendations and price targets on the same company. The market price is generally going to be different than any model you use which is how you would determine whether or not you believe the market is over/under valuing.
Thank you! This narrows down my research question.
DCF Valuation - Attempted a valuation (Originally Posted: 06/10/2008)
I have attempted a valuation of a company which has been projected having staggered equity investments into it.
While doing the valuation the equity IRR works out to about 17% however the NPV works out to a value less than the total equity inflow...
ie say the total equity inflow is 1000 over a period of time the NPV works out to just 500
could some one let me know why this happens...
the prospect firm is in the starting phase and presently all figures are just projected... hence at this point of time there is no cash balance or debit availed.
in this case shouldnt FCFF be equal to FCFE
I want to value the present value per share
regards
Are you doing your valuation based on the DCF when u calculate ur IRR?
There is nothing wrong with that. NPV should be calculated as pv of return AFTER subtracting initial investments, and thus NPV less than equity investment signifies nothing. The fact that NPV is positive and equity IRR is positive is logical - whether those numbers are correct will depend on your model, but conceptually, there is nothing wrong.
As for FCFE and FCFF, yes they should be the same if there has been / will not be any debt. However, even with projections, you may want to make assumptions as to their future capital structure to capture potential tax shields.
NPV should be the same in a FCFF and FCFE situation as well, though. Not sure if this is what you were asking, but:
Sum of FCFF/Cost of Capital
should be equal to:
Sum of FCFE/Cost of Equity
That's pure theory base. Plenty of reasons (some from the accounting statements) as to why this doesn't work out in practice.
DCF Valuation - Valuation range (Originally Posted: 01/20/2014)
I am working on a valuation but need to change the valuation range. For instance my VP wants the valuation to be from $60-70M instead of $70-80M. Suggestions? Does it have to do with the discount rate/cost of equity/terminal value?
Thoughts?
Thanks
Yes. You can lower the terminal multiple and/or increase the cost of capital.
lol at gaming a DCF to fit somebody else's valuation
Growth rates, chosen comparable multiple, and terminal value are the easiest to fuck with.
Valuation is an art, not a science. He's just painting a different picture.I always messed with growth rates/assumptions first. They're "assumptions", so they're easy to justify with a bit of sweet-talking and "analyst sentiment".
The MD's understanding of value is obviously superior to an analyst's. That's why many IBs don't even bother with plain vanilla DCFs.
As @peinvestor2012 suggested, you can raise the WACC or lower the exit multiple. another good, but less obvious/direct way would be to increase working capital demands. I.e., take longer to collect receivables and pay AP sooner.
This change will impact your delta in NWC and change your ULFC on a DCF.
dcf all day errday
I personally enjoy an arbitrary risk premium for something like customer concentration, regulatory risk, etc.
This is retarded - there are tons of ways to mess with it but if you're too lazy just change the WACC. If that's hard, change the terminal growth rate. If that's hard then just change the forecasts haha
DCF Valuation Help Needed (Originally Posted: 12/26/2014)
Hi Guys, I have some query on a company that I am trying to value on a standalone basis.
When a company is in the mature stage and not expected to grow would you forecast future cash flows for 1 year or 5 years? Additionally, I have assumed the following (please see attachment with the company info)
CAPEX = 0 Change in working capital = 0 Depreciation = 0 Perpetuity growth = 3% (i.e. long term rate of growth of the economy)
Ultimately I came up with a share price of around $18 per share... However I would like to know whether my assumptions are reasonable.
I have uploaded my spreadsheet
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