DCF Stock Valuation

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1. 1. What DCF Valuation Measures

2. 2. Starting With Free Cash Flow

3. 3. Projecting Revenue and Margins

4. 4. Building the Example Cash Flows

5. 5. Choosing the Discount Rate

6. 6. Estimating Terminal Value

7. 7. Discounting Cash Flows to Today

8. 8. From Enterprise Value to Share Value

9. 9. Comparing Value With Market Price

10. 10. Testing Assumptions and Limits

1. 1. What DCF Valuation Measures

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Why does DCF focus on cash flow rather than accounting profit?

Can a DCF prove the exact value of a stock?

DCF valuation:

Present value:

Intrinsic value:

Market price:

DCF valuation:

Present value:

Intrinsic value:

Market price:

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2. 2. Starting With Free Cash Flow

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Is free cash flow the same as net income?

What if the company has negative free cash flow today?

FCFF:

EBIT:

CapEx:

Net working capital:

FCFF:

EBIT:

CapEx:

Net working capital:

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3. 3. Projecting Revenue and Margins

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How many years should be forecast in a basic DCF?

Should revenue growth stay high forever?

Revenue growth:

Operating margin:

Forecast period:

Competitive position:

Revenue growth:

Operating margin:

Forecast period:

Competitive position:

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4. 4. Building the Example Cash Flows

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Why is depreciation added back but CapEx subtracted?

Why does growing revenue often require more working capital?

After-tax operating profit:

D&A add-back:

Working capital increase:

Forecast FCF:

After-tax operating profit:

D&A add-back:

Working capital increase:

Forecast FCF:

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5. 5. Choosing the Discount Rate

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Why use WACC instead of the cost of equity?

What happens if the discount rate is too low?

Discount rate:

WACC:

Cost of equity:

Cost of debt:

Discount rate:

WACC:

Cost of equity:

Cost of debt:

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6. 6. Estimating Terminal Value

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Why is terminal value often so important in a DCF?

Can the perpetual growth rate be higher than the discount rate?

Terminal value:

Perpetual growth:

Final forecast-year FCF:

Continuing value:

Terminal value:

Perpetual growth:

Final forecast-year FCF:

Continuing value:

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7. 7. Discounting Cash Flows to Today

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Why is the terminal value discounted by five years?

Why do later cash flows usually have lower present values?

Present value factor:

Discounted FCF:

Enterprise value:

Time value of money:

Present value factor:

Discounted FCF:

Enterprise value:

Time value of money:

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8. 8. From Enterprise Value to Share Value

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Why subtract debt from enterprise value?

Why add cash by using net debt?

Equity value:

Net debt:

Shares outstanding:

Intrinsic value per share:

Equity value:

Net debt:

Shares outstanding:

Intrinsic value per share:

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9. 9. Comparing Value With Market Price

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Should a stock always be bought if DCF value is above market price?

What if the market price is close to the DCF value?

Undervalued:

Overvalued:

Implied upside:

Margin of safety:

Undervalued:

Overvalued:

Implied upside:

Margin of safety:

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10. 10. Testing Assumptions and Limits

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Which DCF assumption is usually most sensitive?

How should a beginner avoid false precision in DCF?

Sensitivity analysis:

Scenario analysis:

Model risk:

Forecast uncertainty:

Sensitivity analysis:

Scenario analysis:

Model risk:

Forecast uncertainty:

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