Valuation

Equity Value and Enterprise Value

Enterprise Value vs. Equity Value
Enterprise Value = Equity Value + Net Debt (Total Debt – Cash & ST Securities)

Enterprise Value Equity Value

• EV represents the value of the company’s • Equity Value represents the value of all a
core business operations to all investors company’s assets, but only to the
• On a practical level EV also implies how company’s equity investors
much you would have to pay to acquire the • Includes non-operating assets and
entire business. I.e., buying out the interests liabilities
of both debt and equity investors
• Equity Value is influenced by financing
• Not influenced by financing actions actions
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Net Debt and Financial Obligations
When moving from Enterprise Value to Equity Value (and Vice Versa) we want to consider the impacts of non-operating assets and liabilities

Easy Formula Complex Formula

• Enterprise Value = Equity Value + • Enterprise Value = Equity Value +

Total Debt – Excess Cash Total Debt + Non-Controlling Interest
+ Preferred Stock + Financing Leases
Unfunded Pension Obligations – Excess
Cash – Net Operating Losses – Equity
Investments

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Perpetuity Formula
A company’s value is measured based off its cash flow, discount rate, and future growth

!"#$ &'()
Value =
*+#,(-./ 0"/1 234()/$ 0"/1

• Give a constant WACC and growth rate, we can estimate the value of the company
• Use WACC and ULFCF for Enterprise Value

• Use Cost of Equity and LFCF for Equity Value

• We will dive into what these terms are later in the lecture

• Note: this formula is really important for interviews

1. Note: This formula is simply an infinite geometric sum assuming the present value of the future cash flows approaches 0 into perpetuity 5
Intrinsic vs Relative Valuation
Intuition of Valuation
Why do we care and what do we use it for?

• The entire theory of value investing is purchasing shares in a business at a discount to

actual value

• Less than high quality companies can become excellent investments given the right price
• Highest quality of company can prove to be a poor investment given an egregious valuation

• Valuation is critical because it enables us to determine which companies are trading at

the wrong price and which companies are trading at prices that could make them
attractive investments

• There are two primary valuation methodologies: intrinsic valuation and relative valuation

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Intrinsic Valuation vs. Relative Valuation
Intrinsic Valuation Relative Valuation

• Intrinsically values a company based • Bases the value of the firm off what its peer

off expected future cash flow companies are valued at

generation • Determines this valuation off some

“multiple” of a metric
• Works more through theory not the
market • Ex: EV/EBITDA, EV/EBIT, EV/Revenue

• Based heavily on modeled • Include Comparable Companies, Precedent

Transactions, etc…
assumptions
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Valuation in Practice
Intrinsic Valuation Relative Valuation

• Determine what multiples peer firms are trading at

• Use the company’s historical
• Ex: EV = 8x EV/EBITDA, 6x EV/EBITDA, etc…
financials to project revenue down • Take the min, first quartile, median, etc… of the data
set
to cash flows
• Apply multiple to company’s metric
• Determine the sum of the present • Ex: Company ABC has 100 million EBITDA. Using
value of those cash flows to arrive the median 7x EV/EBITDA leads Enterprise Value
to 700 million
at a valuation

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Specific Methodologies
Intrinsic Valuation

• Discounted Cash Flow

• Comparable (A.K.A Comps) Valuation
• Calculates value based off present value of future cash
flows • Find public companies in similar industries
• Most common and markets, and find what the value the
• Residual Income Model market has placed on that firm
• Calculates value based off returns generated above cost
of equity • Precedent Transactions Valuation
• Used commonly in banks
• Find companies in similar industries and
• Dividend Discount Model
markets that have been sold or acquired and
• Calculates value based off present value of future
dividends find the value they were bought for
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Intuition Behind Intrinsic Valuation
Advantages Disadvantages

• Discounted Cash Flow Analysis is • It is incredibly difficult, for all practical

theoretically “correct” purposes impossible, to determine how a

• The formulaic nature of analysis company will perform over the next ten

enables analysts to tweak years much less perpetuity

assumptions at their discretion and • Producing earnings assumptions within

give them a 10,000-foot view over either period will likely be far off and
the drivers of valuation certainly not be 100% accurate

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Intuition Behind Relative Valuation
Advantages

• Relative valuation is based off of market • Highly volatile data and sensitive to the current
conditions and thus can be more reflective of market
the market’s view of growth rates, • Markets are not efficient, and they can always be
reinvestment rates, and discount rates (the wrong
drivers of multiples) than a discounted cash
• When a multiple is fair vs. nonsensical is difficult
flow analysis
to interpret, i.e., if you valued tech companies
• Fewer assumptions baked into the valuation using 1999/2000 multiples
methodology reduces the margin for error
• Often comparable companies are not actual
substantially, of course you still have the
perfect comparable
trouble of forecasting financials
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Comparable Valuation
Comparable Valuation Method Overview
1. Find the public companies you think are good comparisons to the firm you are

analyzing

2. Identify metrics and multiples to use (Ex: EV / EBITDA)

3. Find the said metrics and the multiples for all the comparable companies

4. Find and apply the median, 25th or 75th multiples from the data to your company to

find the implied Equity or Enterprise Value

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Finding the Right Comparable
• 3 main factors in deciding which companies are applicable to use in your analysis

• Geography: preferably same country

• Industry: same industry, similar end markets, similar supply chains

• Financial size: similar revenue (usually under one billion or between 1 – 20 Billion

• Ex: Oil and Gas Companies in the United States with over 5 billion in Revenue

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Finding the Right Multiple
• In service of comparability, use LTM Metrics (Last Twelve Months).

• Sales/Revenue metrics and multiples

• Revenue, Revenue Growth, EV/Revenue

• Use 1 - 2 profitability-based metrics

• EV/EBITDA, EBITDA Growth, Net Income, Price/Earnings

• Make sure you use the proper X / Y multiple

• If you are calculating equity value, you must use a metric that is only available to equity holders (Net Income and P/E)

• If you’re calculating enterprise value you should use a metric that’s available to all investors (EBIT, EBITDA, etc…)

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Calculate Metrics and Multiples
• Use simple math to find the metrics

• For example, an EV/Revenue multiple would just be EV divided by revenue.

• Tips on finding actual figures:

• Finding equity value: Just use the market cap value

• Finding enterprise value: equity value + debt + preferred stock + NCI – cash

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Find and Calculate Benchmarks
• 5 Benchmarks that you are seeking to find:
• Maximum, 75th Percentile, Median, 25th Percentile and minimum

• Then you use your firm’s metrics to find their valuations at each of these
benchmarks and project it against the current share price to find a range of
implied valuations
• To move from Enterprise to Implied Equity Value just add cash and non-core assets then
subtract debt and preferred stock

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Precedent Transactions
Method
Precedent Transactions Method Overview

1. Search for Relevant Transactions

2. Find the valuation multiples that best fit

3. Analyze valuation multiples and find benchmarks

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Step 1: Searching for Relevant Transactions
• You want to have a wide scope at first to find as many deals as possible

• Transactions should be of the same industry (including similar end markets, product mix, and

suppliers)

• Transactions should also be of the same geography and approximate financial size

• Important considerations to make outside of company fundamentals are how the company’s

status as a private or public company impacts transaction price, and moreover how the price is

impacted by the nature of the acquiror (i.e., are they a sponsor or a strategic acquiror)

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Determine and find Multiples

• May be dependent on industry…

• Multiples are the exact same as those utilized in a public comps analysis

• EV/EBITDA

• EV/Revenue

• Like Comps, go through and find 5 benchmarks

• Max, 75th Percentile, Median, 25th Percentile, Min

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Apply Benchmarks to the firm in question
Multiply the multiple by the firm’s financial metrics and find estimated valuations

High: 7x EV/EBITDA

High Valuation: $4.2 Billion

$600 MM TTM
EBITDA
High: 3.5x EV/EBITDA

Floor Valuation: $2.1 Billion

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Discounted Cash Flow Models
What is a Discounted Cash Flow Model?
A Discounted Cash Flow Model is a theoretical way of valuing a company buy projecting out its’ future cash flows and discounting them to find the Present Value
of a firm

Free Cash Flow

Discounted Cash Calculating

Flow Model Discount Rate

Calculating
Terminal Value
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Mathematical Overview of a DCF
$ %
Discounted Cash Expands to 𝐷𝐶𝐹 𝑉𝑎𝑙𝑢𝑒 = +
𝐶𝐹!
[+
𝐶𝐹!
] +
𝐶𝐹% (1 + 𝑔)
Expands to
Flow Model (1 + 𝑟)! 1+𝑟 ! 1 + 𝑟 % (𝑟 − 𝑔)
!"# !"#

%
Free Cash Flow Expands to +
𝐶𝐹!
1+𝑟 !
!"#

Calculating 𝐶𝐹% (1 + 𝑔)
Expands to
Terminal Value 1 + 𝑟 % (𝑟 − 𝑔)

CFt = Cash Flow in Year ”t” g = Terminal Growth Rate

r = Discount Rate n = Last year of projections 26
Calculating Free Cash Flow
ULFCF vs LFCF
Unlevered Free Cash Flow Levered Free Cash Flow

• Metric that finds available cash to • Levered Free Cash Flow

the entire firm (debtholders and • Metric that finds available cash to
equity holders) only the equity holders of a business
• Most relevant to Enterprise Value
(remember the balance sheet)

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Calculating Unlevered Free Cash Flow
𝑼𝑳𝑭𝑪𝑭 (𝑼𝒏𝒍𝒆𝒗𝒆𝒓𝒆𝒅 𝑭𝒓𝒆𝒆 𝑪𝒂𝒔𝒉 𝑭𝒍𝒐𝒘)=𝑬𝑩𝑰𝑻 ∗(𝟏−𝑻)+𝑫&𝑨 −𝑪𝒂𝒑𝒆𝒙 − ∆𝑵𝑾𝑪

• Unlevered Free Cash Flow

• Step 1: Begin with Earnings Before Interest and Taxes (EBIT)
• Step 2: Subtract Taxes
• Gov’t always takes a portion of EBIT that neither the firm or stakeholders can access

• Step 3: Add back D&A and other non-cash expenses

• want to figure out true change in cash

• Step 4: Subtract Capital Expenditures.

• CapEx is is a real cash use but not included in EBIT.

• Step 5: Subtract Increases in Net Working Capital

• Changes in working capital represent an inflow or outflow of cash to change these assets.

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NOPAT
Net Operating Profits After Taxes (NOPAT) = 𝐸𝐵𝐼𝑇 ∗(1 −𝑇)

• EBIT stands for “Earnings Before Income and Taxes”

• Net Operating Profit After Taxes represents your post tax operating
income
• Focuses on income that has come directly from operations.

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D&A and Capital Expenditures
+ 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 & 𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 −𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠

• Found on the Cash Flow Statement

• D&A –> Cash Flow From Operations
• Capital Expenditures -> Cash Flow From Investing

• Capital Expenditures are a real use of cash

• D&A are non-cash expenses that are included in EBIT Value (must add-back)

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Change in Net Working Capital
𝑁𝑊𝐶=(𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠−𝐶𝑎𝑠ℎ −𝑆ℎ𝑜𝑟𝑡 𝑇𝑒𝑟𝑚 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠)−(𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠−𝑆ℎ𝑜𝑟𝑡 𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡)

• Changes in Net Working Capital are found on the Balance Sheet

• Take Current Assets and subtract cash and Short-Term Securities

• Take Current Liabilities and Subtract Short Term Debt

• ∆𝑁𝑊𝐶 = NWC Current Year – NWC Previous Year

• Best to think of in terms of the cash a firm needs to have on hand in order to
continue running the business for the next year

1. 𝑆𝑡𝑒𝑝𝑠 3 & 4 :+ 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 & 𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 −𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠 32

More on Changes in Net Working Capital
We subtract increases to net working capital
Current Assets Current Liabilities

• (𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑎𝑠ℎ − • (𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠−𝑆ℎ𝑜𝑟𝑡 𝑇𝑒𝑟𝑚

𝑆ℎ𝑜𝑟𝑡 𝑇𝑒𝑟𝑚 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠) 𝐷𝑒𝑏𝑡)
• If this side of the equation increases, it means • An increase of current liabilities means
the company used cash to acquire assets an inflow of cash that has not been paid
• Represents a decrease in Free Cash Flows yet.
• Represents an increase in Free Cash
Flows
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Putting Unlevered Free Cash Flow in Perspective
Advantages of ULFCF Disadvantages of ULFCF

• Good baseline metric that is hard to • Can be hard to predict, specifically Net

be manipulated Working Capital

• Hard to be shaken through aggressive • Assets and Liabilities can be volatile

accounting

• Shows the cash available to both

debt and equity holders

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The Discount Rate
What is a Discount Rate?
Apply the Discount Rate to future values due to the time value of money

• 1000 dollars today is worth more than 1000 dollars tomorrow

• Opportunity Cost

• The discount rate is the return demanded on an asset with similar risk profile

• You could invest 1000 dollars into a substitute investment with similar risk and
get a x% return.

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Discount Rate Examples
Discount rates apply to equity-based metrics and firm-based metrics
Cost of Equity Cost of Capital

• Discount rate applied to equity • Cost of Capital or Weighted Average Cost

Of Capital (WACC)
metrics
• Uses proportionality of equity and debt to find the
• ex: Levered Free Cash Flow average opportunity cost of investing capital (both debt
and equity) into the business

• Calculated with the Capital Asset • Cost of Capital matches up to risk profile of a
firm
Pricing Model • A startup will have a higher cost of capital than a
legacy car brand

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What is a Discount Rate? (Cost of Capital)
𝑫 𝑬
𝑾𝒆𝒊𝒈𝒉𝒕𝒆𝒅 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑪𝒐𝒔𝒕 𝒐𝒇 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 = 𝑹𝒅 ∗ ∗ 𝟏 − 𝑻 + 𝑹𝒆 ∗
𝑫+𝑬 𝑫+𝑬

• 𝑅5 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐷𝑒𝑏𝑡 = 𝑅𝑖𝑠𝑘 𝐹𝑟𝑒𝑒 𝑅𝑎𝑡𝑒 + 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 + 𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚

• 𝐷 = 𝐷𝑒𝑏𝑡

• 𝐸 = 𝐸𝑞𝑢𝑖𝑡𝑦

• 𝑇 = 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒

• 𝑅1 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 = 𝑅𝑖𝑠𝑘 𝐹𝑟𝑒𝑒 𝑅𝑎𝑡𝑒 + 𝛽𝑒𝑡𝑎 ∗ 𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚

38
What is a Discount Rate? (Cost of Capital)
𝑫 𝑬
𝑾𝒆𝒊𝒈𝒉𝒕𝒆𝒅 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑪𝒐𝒔𝒕 𝒐𝒇 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 = 𝑹𝒅 ∗ ∗ 𝟏 − 𝑻 + 𝑹𝒆 ∗
𝑫+𝑬 𝑫+𝑬

Weighted Average Cost of Capital (WACC)

Cost of Equity Cost of Debt

Equity Risk
Beta Avg Debt Yield Tax Shield
Premium

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Defining the Cost of Debt:
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐷𝑒𝑏𝑡 = 𝑅𝑖𝑠𝑘 𝐹𝑟𝑒𝑒 𝑅𝑎𝑡𝑒 + 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 + 𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚
• Risk Free Rate: The rate that investors expect no matter the investment. Represents the minimum return an
investor demands. Think of the return from buying a U.S. Treasury

• Credit Premium: What an investor demands in exchange for providing credit to a firm. Fundamentally, it
represents the amount of basis points an investor demand over the yield of the US Treasury in order to
compensating for the risk of the investment.

• Risk Premium: What an investor demands in collateral for adding risk to their portfolio by investing in debt.
Varies based on the risk profile of the asset

• Cost of Debt separates in to 2 main sections:

• Risk Free Rate: Bottom line Return demanded (general market)
• Credit Spread: Credit Premium and Risk Premium (company specific)

40
How do we find these numbers?
Credit Spread Weighted Average Interest

• Identify the Credit Rating for the firm and • Find the weighted average of yields
think through a logical credit spread based and interest for the debt the firm
off both the Credit Rating and Risk
holds
profile
• Usually, a page in a company 10 K, that
• Use a table to tell you what the credit
will give you a layout of the yields the
spread should be and then add the risk-
firm is paying on debt
free rate

41
Identifying a Credit Rating and Credit Spread
• Say you identify a firm with an A+ credit rating
and a 4% Risk Free Rate
• Go to the table and find what the credit spread for
A+ firms are
• Credit Spread for A1/A+ = 1.03%

• Recall Cost of Debt Formula

• Risk Free Rate + Credit Spread
• 4% + 1.03% = 5.03% Cost of Debt

42
Defining the Cost of Equity (CAPM)
Capital Asset Pricing model gives the expected excess return of any asset given its risk related to the market

𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 𝑃𝑟𝑖𝑐𝑖𝑛𝑔 𝑀𝑜𝑑𝑒𝑙 = 𝑅W + 𝛽(𝑀𝑎𝑟𝑘𝑒𝑡 𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚)

- Risk Free Rate (𝑅! ) : The rate that investors expect no matter the investment. Represents the minimum return
an investor demands. Think of the return from buying a U.S. Treasury

- Beta Sensitivity(𝛽) : Non-diversifiable risk correlated to the overall market

- 𝛽 > 1 means that the investment is riskier than the market, 𝛽 < 1 means the investment has less risk

- Market Risk Premium: Expected excess return of the market over the risk-free rate
- Expected return of the market – Risk Free Rate

43
Intuition behind CAPM:
- Risk free rate (𝑅6 ) : The minimum rate that the investor demands from any money he
would put into the market, again usually compared to T-Bill returns

- Beta (𝛽) : Beta is a measurement of systematic, not idiosyncratic risk

- If beta were 1.4, then you should expect the asset to be 40% more volatile than the market
- If beta were -.8, then you should expect the asset to be 20% less volatile than the market

- Beta is then multiplied by the Market Risk Premium

- 𝑀𝑎𝑟𝑘𝑒𝑡 𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚: 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑓 𝑡ℎ𝑒 𝑀𝑎𝑟𝑘𝑒𝑡 − 𝑅𝑖𝑠𝑘 𝐹𝑟𝑒𝑒 𝑅𝑎𝑡𝑒
- Since Market Risk Premium gives an expected return of money on average in the market, you
need to multiple by Beta in order to account for the volatility/risk of the profile
44
Capital Structure and WACC:
More Debt is Not Always Better!

Two reasons for this:

1) Increasing leverage results in an
increasingly higher cost of debt
2) The levered beta component of
WACC increases

45
Terminal Value
Finding Terminal Value
• We can only accurately project cash flows of a business out for a couple of
years with confidence (usually 5-10 years)

• The business continues to operate and generate cash flows beyond the
projected period

How do we find that number?

1. Gordon Growth Formula

2. Exit Multiple Formula

47
 Remembering the Math

%
Discounted Cash Expands to
$
𝐶𝐹! 𝐶𝐹! 𝐶𝐹% (1 + 𝑔)
𝐷𝐶𝐹 𝑉𝑎𝑙𝑢𝑒 = Z Expands to [Z ]+
Flow Model (1 + 𝑟)!
!"#
1+𝑟 !
!"#
1 + 𝑟 % (𝑟 − 𝑔)

Calculating Expands to
𝐶𝐹! (1 + 𝑔)
Terminal Value 1 + 𝑟 ! (𝑟 − 𝑔)

CFt = Cash Flow in Year ”t” g = Terminal Growth Rate

r = Discount Rate n = Last year of projections
48
Gordon Growth Formula
𝐶𝐹! 1 + 𝑔
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 =
𝑟−𝑔
• Gives the value of the firm’s cash flows into perpetuity

• Cash flows grow at a constant rate (g) into perpetuity

• Typically, this value is between inflation rate and GDP growth rate

• Terminal Value can’t be greater than GDP growth (theoretically) because the
firm will eventually be larger than the entire economy
49
Exit Multiple Strategy
Theoretically not a good way to value because it turns the valuation into relative valuation

• Relies on using relative valuation to find a terminal value

• Find a financial metric such as EBITDA, EBIT, etc...

• Find a way to multiple to find terminal value
• Usually rely on an industry standard
• Lastly Discount to PV

50
Overview of the Discounted Cash Flow Process
Step 1: Forecasting free cash flows (choose levered or unlevered)
• 𝐹𝑟𝑒𝑒 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 = 𝐸𝐵𝐼𝑇 ∗ 1 − 𝑇 + 𝐷&𝐴 − 𝐶𝑎𝑝𝑒𝑥 − ∆𝑁𝑊𝐶

Step 2: Finding a terminal value

• Either use the Gordon Growth Method (Intrinsic) or the Exit Multiple Method (Relative)

Step 3: Find and calculate the Weighted Average Cost of Capital (WACC)

Step 4: Apply the discount rate (WACC) to the free cash flows and the terminal value

Step 5: Sum both the discounted free cash flows and the discounted terminal value to find enterprise value

Step 6: To find Implied Equity Value subtract Net Debt

Step 7: Divide Implied Equity by Outstanding Shares in order to find Implied Share Price

51
DCF in Practice
When to Use DCF: When Not to Use DCF:

• Mature Company • Variable Cash Flows

• Stable Cash Flows • A company that is sharply free cash flow negative. It
is difficult to project cash flows far into the future
• Public Companies

• You can for private and use comparable • Companies which should not be valued using free

companies to estimate Beta/WACC cash flow generation (usually do to how debt is

utilized, i.e., financial institutions)

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DCF Important Notes
• Revenue & Cash Flow growth rates should decline near end of projection. The
goal of the projection period is to have FCF growth rates meet your terminal
growth rate

• ROE and ROIC should not be increasing near end of period

• Remember Mean Reversion

• Typically, don’t project beyond 5-10 years as it becomes more unreliable

• Make sure Cash Flows are stable

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