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The only video you need to watch on

DCF

Valuation by GCR’s Hosted By:

Global Consilient Research Valuation Modeling Piyush Kumar
WHY DCF GLOBAL
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VALUATION
Before diving into the mechanics of DCF modeling, it’s essential to understand the
core principles that underpin this valuation approach.

Simply learning how to do DCF in excel is not enough for you to have a great
understanding of valuation principles!

There are certain principles that we need to address and understand

Valuation by GCR’s Hosted By:

Global Consilient Research Valuation Modeling Piyush Kumar
First principle: TVM
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"A rupee today is worth more than a rupee tomorrow"

This is the foundation of DCF analysis. Money loses value over time due to
inflation, risk, and opportunity cost.

Why It Matters in DCF:

Future cash flows need to be discounted to their present value (PV) to

account for the fact that receiving money today is preferable to
receiving it later.
A higher discount rate means a lower present value of future cash flows,
reflecting higher risk or opportunity cost.

Valuation by GCR’s Hosted By:

Global Consilient Research Valuation Modeling Piyush Kumar
reverse of GLOBAL
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compounding
At its core, Discounted Cash Flow (DCF) is just compounding in reverse.

1. Understanding Compounding

When we invest money today, it grows over time due to compounding

interest.

Formula for Future Value (FV) using compounding: FV=PV×(1+r)^n

Valuation by GCR’s Hosted By:

Global Consilient Research Valuation Modeling Piyush Kumar
 GLOBAL
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Now, the DCF simply works in reverse (Discounting)

Instead of growing money forward, DCF brings future money back to

today’s value.

Formula for Present Value (PV) using discounting (Reverse Compounding):

PV= FV​/(1+r)^n

Valuation by GCR’s Hosted By:

Global Consilient Research Valuation Modeling Piyush Kumar
Principle 2: Cash & not profits
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“Cash is king" A company’s value is determined by the actual cash flows it

generates, not accounting profits.

Why It Matters in DCF:

Profit figures (Net Income) can be manipulated by accounting policies,

depreciation, and non-cash expenses.
Free Cash Flow (FCF) reflects the real money available for investors and is
used in DCF.
FCF accounts for capital expenditures (CapEx), working capital changes,
and operating expenses—all crucial in determining business sustainability.

Valuation by GCR’s Hosted By:

Global Consilient Research Valuation Modeling Piyush Kumar
Principle 3: Risk and
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the Discount Rate

“Higher risk means a lower present value”

Why It Matters in DCF:

Investors demand a return that compensates them for risk.

The discount rate (WACC or required rate of return) reflects the risk level of
future cash flows.
A higher risk company (like a startup) will have a higher discount rate, making
future cash flows less valuable today.

Valuation by GCR’s Hosted By:

Global Consilient Research Valuation Modeling Piyush Kumar
 GLOBAL

Principle 4: terminal value CONSILIENT

RESEARCH

"Most of a company’s value comes from future cash flows beyond the
forecast period"

Why It Matters in DCF:

Businesses exist indefinitely, and DCF captures value beyond just the next
5–10 years.

The Terminal Value (TV) estimates the company’s worth after the
projection period using a stable growth assumption.

Valuation by GCR’s Hosted By:

Global Consilient Research Valuation Modeling Piyush Kumar
 GLOBAL

terminal value CONSILIENT

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The Terminal Value (TV) represents the value of a business beyond the
explicit forecast period (usually beyond 5–10 years).

Since businesses don’t just stop after the forecast period, we need to
estimate their long-term worth using Terminal Value.

1. Gordon Growth Model (Perpetuity Growth Model)

2. Exit Multiple Method

Valuation by GCR’s Hosted By:

Global Consilient Research Valuation Modeling Piyush Kumar
 Criteria Gordon Growth Model (Perpetuity Growth) Exit Multiple Method

Formula Formula: FCFF*(1+g)/(WACC - g) TV=Multiple×Metric(EBITDA,EBIT,Revenue)

Assumes company is valued at a multiple of financial metric

Concept Assumes company grows at a constant rate forever.
(EBITDA, EBIT, Revenue) based on industry norms.

Exit multiple should be chosen based on comparable

Key Assumptions Growth rate (g) must be lower than WACC.
companies.

Companies in industries where M&A transactions or market

Best Used For Stable, mature businesses with predictable growth.
comps are available.

Industries Suitable Utilities, FMCG, consumer staples (low volatility industries). Tech, startups, private equity, industries with frequent M&A.

Requires identifying relevant industry exit multiples from

Data Requirement Requires estimating a reasonable long-term growth rate (g).
comparable companies.

- Simple & easy to apply. - Based on actual market data (real transactions).
Pros - Works well for mature companies with steady cash flows. - More practical for industries where companies are
- Theoretically sound if assumptions are correct. acquired or sold at multiples.

- Exit multiples can vary over time, leading to inconsistent

Highly sensitive to the choice of growth rate (g).
valuations.
Cons - Overestimation or underestimation of WACC - g can cause
- Can be influenced by market cycles and external factors
large variations in valuation.
(e.g., economic conditions). GLOBAL
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 GLOBAL

WHAT PROFESSOR RECOMENDS CONSILIENT

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Professor Aswath Damodaran, a leading expert in valuation, strongly

discourages the use of the Exit Multiple Method (EMM) for calculating
Terminal Value (TV) in Discounted Cash Flow (DCF) models.

His reasoning is based on first principles of valuation and the risk of

introducing external biases.

He Recommends Gordon Growth Model only

Valuation by GCR’s Hosted By:

Global Consilient Research Valuation Modeling Piyush Kumar
BEFORE YOU GLOBAL
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LEAVE
If you have no idea about basic finance or Valuation Modeling, then I highly recommend you
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