I understand how to walk through a DCF and I know that one of the cons of a DCF is that it is based on assumptions. But what are the assumptions? All of the things you need to find have formulas for example, FCF, WACC, Terminal value, EV. I don't get what is being assumed.
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You're predicting the FCF based off of assumptions of their future EBITDA etc.
Most of the assumptions have to do with the growth of the company. If you are going to calculate FCF for x amount of years into the future, you have to assume revenue and expense growth rates for each of those years. You can use comparable companies or historical trends for those assumptions, but in the end, they are still just assumption.
TL;DR yes, you use assumptions for many of the parts of the formulas you need
So for example when you are using the FCF formula, EBIT isn't a real number from the company, its a number from comparable companies?
You are projecting future cash flows, so for example, if a company's sales has increased at 10% every year for the past 5 years, you could make the assumption that sales will continue to grow at 10% for the next five years, or decrease slightly over time.
Let's start at the beginning - you know these are future free cash flows right?
The first step of the model is to put in the historical values of the statements and then project them into the future. The projecting part is where assumptions come in. Then you use your projections in the formulas etc.
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