Stupid DCF question
Hey guys, I’m self-studying technicals from a non-finance background and am a bit confused about the actual projection of cash flows for DCF valuation. I understand the steps to DCF that I have memorized for interviews—but still am stuck on how to actually accomplish some of them.
For example, I know how to calculate FCF, and I know you are supposed to project FCF for 5-10 years (plus terminal value) then discount using WACC. I know CAPM is used for pricing the cost of equity, and the cost of debt you can find from the BS.
But how do you actually forecast the FCF for those 5-10 years? Do you just calculate the FCF from the latest statement and then assume a constant growth rate for each year? Or do you actually forecast each part of the calculation individually using a fixed growth rate? How do you decide on a given growth rate?
I understand there are different ways and answers to do that, but I am just beginning in this so I would like to know the basics and how you learned DCF when teaching it to yourself for the first time.
Should I be taking a 3-statement modeling course before DCF? Is it needed, or can I take a DCF course first? I understand DCF with given inputs (ie “FCF is forecasted at x each year, y is your discount rate) but I do now understand how to actually figure out those values when they are not given.
thank you!
I would recommend taking a modeling course or watching free videos on YouTube on how to build a three statement model and DCF in Excel. I wouldn’t take a DCF only course. Build a solid model and the DCF is the easiest part.
Memorizing technicals will probably get you through a few basic interview questions, but you need to really understand the mechanics. I think building a model from scratch and applying the theory you have learned is the best way to do that.
Any recommendations on YouTube excel gurus
No. Just type in “3 statement model excel” and watch the popular videos.
1. You typically project the income statement and the balance sheet prior to projecting FCF. This is usually done with Factset pulling from sources like broker reports or management consensus etc. When there is the latest source available i.e. quarterly earnings (analysts don't obsess over them for no reason), you're using that to update the model.
2. Coming off from the point above, there are a number of important assumptions when forecasting free cash flow, mainly tying in from the income statement. Sales growth, operating margins, depreciation, capex, changes in NWC, synergies. I don't understand your growth question. At a high level overview, you're thinking about industry performance and the companies within them.
3. You should probably understand the 3 statements before a DCF.
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