by
DISCOUNTED CASH FLOW CHEAT SHEET Bojan
Radojicic
Purpose
STEPS DCF is used to estimate the intrinsic value of an investment or business by discounting future cash flows to their present
value. It helps determine whether an investment opportunity is undervalued or overvalued.
Revenue forecast
Pros Cons
1 HISTORICAL FINANCIAL ANALYSIS Identify key drivers
Gather data
Analyze trends
Takes earning potential into DCF heavily depends on
The discount rate is the minimum rate of return acceptable Develop assumptions
account accurate and reliable
to the investor. projections Create a forecast
Flexible method that can be
The absolute value of the discount rate depends on the COGS forecast
tailored to different types of Subjectivity of these
definition of the discount rate. Namely, for cash flow after Identify the components of COGS
assets or businesses assumptions can introduce
debt servicing, a simple discount rate is used, while for Collect data on historical COGS
biases and uncertainty
cash flow before debt servicing, a weighted average cost of most important metric is % of cogs in
capital (WACC) is used. Future oreientated
A slight change in projected Revenue
Enables sensitivity analysis by cash flows or discount rates Analyze trends
allowing the modification of can result in significant Develop assumptions
2 INCOME STATEMENT FORECAST assumptions variations in the estimated
present value OPEX forecast
Provides a quantitative basis Use historical share in total revenues
for comparing different Difficulty in Determining the Adjusted for some assumptions
Projections of revenue, COGS, OPEX, salareis, amortization, Discount Rate
investment opportunities
depreciation, interest etc..
Depreciation forecast
Start by identifying the assets that will
3 CAPEX and NWC forecast
CF FORECAST SUMMARY
be depreciated
Determine useful life
Choose a depreciation method
Forecasting capital expenditures (capex) is an important Calculate depreciation expense
part of the valuation modeling process, as it allows
businesses to plan for and manage their investment in
long-term assets. NWC
4 DEFINE PERIOD AND FORECASTING CF + AR = Sales / DSO
+ Inevnotirs (I = Cogs / DIO)
- Payables (AP = Costs / DPO)
5 DISCOUNT RATE DETERMINATION
The cost of equity is the expected rate of return that DCF Formula
shareholders require to invest in a company’s common
equity. In other words, it is the return that investors expect
to receive on their investment in the form of dividends
and capital gains. DCF based valuation WACC
Risk-free rate CF₁ = Cash flow for the first period
When conducting a valuation, the cost of equity is an
Equity risk premium CF₂ = Cash flow for the second
important factor to consider as it reflects the investors’
perception of risk associated with the company’s future Relevered industry period
earnings. A higher risk perception means a higher cost of beta
CFₙ = Cash flow for “n” period
equity, and vice versa. Sub-total n = Number of periods
Specific risk premium r = Discount rate
Cost of equity
Industry - database
6 LONG TERM GROWHT RATE Cost of debt
Corporate tax rate
Terminal Value (TV)
Cost of Debt after tax
(ND / EV) TV = (FCFn x (1 + g)) / (WACC – g)
WACC
7 TERMINAL VALUE CALCULATION Local inflation
WACC result
FCF = free cash flow.
n = year 1 of terminal period or final
year.
g = perpetual growth rate of FCF.
WACC = weighted average cost of
8 DISCOUNITNG CF
capital.
Sensitivity analysis example (long term
rate + WACC
9 FINAL ADJUSTMENT AND SENSITIVITY
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