Does anyone actually use DCF’s?
Question for current/ ex bankers. I’m a current 2nd year analyst at an EB and I’ve never seen a DCF. It seems like this was taught broadly as a common valuation method when I was prepping for the job and I’m trying to understand if my experience is the norm or if it has to do with the transactions I work on.
My theory would be at this point your wacc/ discount rate is so low that you get such high valuations it just doesn’t make sense to use really. Would love to hear if this has been the experience of others as well.
Are you in a sector that is very mature and relatively low growth? That's probably why if so. Less relevant
My team will use them in pitches when building a football field to illustrate valuation range but I cover Fintech so they're pretty useless and we always focus on transaction and public multiples anyway. I have a template so throwing one together isn't terribly time consuming, but a big waste of time and the MD wants to see a DCF so the MD gets a DCF.
Unfortunately commonly included in my materials but frankly almost everything trades on a multiples basis and dcf is just dumb because it gets back solved into to produce a similar value to the multiple range. When spreading wacc and other inputs that get us outside of the zip code of our sotp or multiples approach we sometimes just toss it lol nobody takes dcf seriously it seems
Yes, primary valuation method in my coverage industry. Also at an EB.
What industry? And mind sharing rough size of transactions? I struggle to understand how it could make sense/ why it would be used when an LBO or multiples should be more meaningful in any situation I can think of.
Original poster—yes, I’ve seen a dcf done, but it’s often very back of the envelope and backed into, so everyone knows it’s complete bullshit. It’s also often a template. Also, for the person above, no not a low growth sector.
If you ever do a fairness opinion, you’ll have to do a fully-baked DCF that will likely be scrutinized
Occasionally to cross check. More for mining. I never use it for most other industries.
To give you another data point, I banked in 2014, 2015,16,17 and 19. DCF then for me (mainly product banker with most transaction experience prob on the m&a-type side but have exp in RX, ecm, PE/lbo, board/fairness stuff too among other types) seems like it was fairly routinely used based on my memory for different transactions and different analyses. Not that I necessarily was doing a DCF a week, but it was a common enough exercise that maybe I was doing it a bit less than that pace but still maybe kinda close.
Dumb intern question. Why is the DCF concept so widely tested in the interviews if its rarely used in actuality? Do bankers mostly use relative valuation and precedent transactions then? Thanks.
DCF questions get asked because it's a gating questions that's pretty easy. If you ask something more complicated, it might screen too much when you are looking for summers. It's also basically something that shows you have a pulse and have bothered to read the guides so you don't end up with as many people who accidentally find themselves in banking and want out in six months.
It depends what are you doing. Yeah, if it's like something that's client facing DCFs aren't used. Precedents and comps are going to be more valuable, the client is going to be able to have a better discussion on those. But on an internal perspective, we use DCFs a lot to assess the collateral we have since most (aside from ABLs) debt banks hold or originate will have a first lien collateral on the EV of a company basically.
I hear. Maybe it’s just my experience but the clients I dealt with I think fairly regularly wanted DCFs. I’m not sure if at the places I was at we really had too many internal committees or even risk management people (prob due to lack of use of a balance sheet to get deals done for most part) which may explain why our exps may be diff
Genuinely thought this post was sarcastic at first.
I think what's more important isn't the value that the DCF spits out to you but what it's drivers explain to you. It's a tool to help you understand the drivers that are embedded but not apparent in your multiples analysis for example.
If you'v
Biotech companies
We do them in metals and mining
Out of curiosity are you primarily doing an NAV model with a terminal value of $0 or just a regular DCF? Always wondered how M&M groups went about valuation
Former
Yes - but in restructuring it really is garbage in garbage out
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