DCF Valuation

(Discounted Cash Flow)

Formula: 3 Methods:
1. DCF
C1 C2 Cn
DCF = (1+r)1
+
(1+r)2
+ ... +
(1+r)n
2. Comparable companies / multiples
3. Comparable acquisitions / precedents /
transactions
*Note: C = cash flow, r = interest rate
When to Use:
Steps to Calculate:
DCF = “intrinsic”
1. Estimate future cash flows Best for predictable cash flows, or when
2. Estimate terminal value no similar companies exist
3. Convert to present values (use WACC) Comparable methods = “relative”
4. Add together (gives enterprise value) Best for unpredictable cash flows, limited
data, and for financial institutions

Financial Statements
Balance Sheet
Income Statement Cash Flow Statement Assets
Current assets
Revenue Operations cash flow Cash
Revenue Net income Short-term investments
COGS Depreciation / amortization Accounts receivable
Gross profit Deferred tax Inventory
Stock based compensation Long-term assets
Expenses Change in working capital Long-term investments
Operating expenses
PP&E
SG&A Investing cash flow Intangible assets
R&D Capital expenditures
Operating income (EBIT) Net assets from acquisitions Liabilities & equity
Interest Purchase / sale of investments Current liabilities
Taxes Short-term debt
Net income Financing cash flow Current portion LT debt
Cash dividends paid Accounts payable
Change in capital stock Long-term liabilities
Issuance / reduction of debt Long-term debt
Net change in cash Deferred taxes
Retained earnings = net income -
Shareholder’s equity
dividends + previous retained earnings
Capital stock
Retained earnings

Is M&A Accretive / Dilutive? (Trick) Additional Formulas

1. Ask: all stock deal? Enterprise value = market cap + preferred stock + minority interest + debt -
2. If yes… cash and cash equivalents
E D
a. Accretive if buyer has WACC = [cost of equity * (E + D) ] + [cost of debt * (E + D) * (1 - tax rate)]
higher P/E ratio
b. Dilutive if seller has Note: E = market value of equity, D = market value of debt
higher P/E ratio

Investment banking interview cheat sheet created by IGotAnOffer.com

For detailed explanations of the above topics, visit the free companion guide.