Is this a proper way to explain DCF?
First you build a 5yr forecast of a company's FCF based on assumptions for revenue growth using the financial statements. The formal for FCF = (EBIT)(1- Tax rate) + dip + amort - cap expenditures - changes in working capital.
Then you discount the FCF's using WACC in order to get the net present value. The formula for WACC = (% of equity)(cost of equity) + (% of debt)(cost of debt)(1- tax rate).
After figuring out the net present value determine the terminal value using either the multiples method or the gordon growth method.
Growth method= FCF5(1 + Growth rate) / (WACC - growth rate) * choose a growth rate a little bit higher than the GDP rate
Multiples method= choose an exit multiple (EV/EBITDA) from comparable companies and assign it to the last years FCF
- Finally you discount the cash flows back to the present value to get the enterprise value.
EV = CF1/ (1+WACC) + CF2/ (1+WACC) + CF3/ (1+WACC) + CF4/ (1+WACC) + CF5/ (1+WACC)
Yes.
Just remember that for the final equation, its CF1 / (1+WACC) + CF2 / (1+WACC)^2 + .. etc, not just each years cash flow divided by (1+WACC)
Please remember that this explanation refers just to the FCF-to-firm model and while working with financial intitutions for example, the proper valuation method should be based on FCF-to-equity (and discounting with cost of equity, instead of WACC). In this case, the present value of the cash flows reflect the Equity Value of the firm.
Pariatur itaque quod odit placeat ab. Eos sunt quasi perspiciatis voluptatem dolorem non dolorem. Deserunt dolores commodi sunt architecto labore. Deserunt eos aut et et accusamus et expedita. Aliquid labore autem ut et et. Natus adipisci suscipit et.
Non molestiae corrupti molestias asperiores ut fugit facere. Et amet incidunt et vitae et quo inventore totam. Et vel explicabo optio. Facilis iusto ut ut tempore rerum libero neque. Aperiam nihil et similique ab. Sint saepe est omnis voluptate vel ad ut. Omnis rerum fugit provident ex asperiores vel labore.
Velit aut esse recusandae est natus id. Ut deserunt dolore voluptatem. Recusandae aut deleniti possimus. Qui iure iusto ea cupiditate.
Blanditiis nisi odit autem suscipit sed rerum nisi suscipit. Molestiae sint qui dolore aspernatur. Nulla ex ut cumque id.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...