Day 2 - Discounted Cash Flow (DCF) Valuation

Day 2 - Discounted Cash Flow (DCF) Valuation

During this session, participants learn how to build a discounted cash flow valuation model. The session starts with an overview of the valuation methodology, and the steps required in setting up a valuation model. We then focus on the calculation of free cash flow and a detailed ratio analysis is used to establish the reasonableness of the forecasts and to identify when the target company reaches steady state. We analyze the weighted average cost of capital, breaking it down into its components. We complete the valuation model by calculating terminal values, using both the exit multiple method and the perpetuity growth method, and discounting values to the present to calculate enterprise values and share prices. Once the valuation is complete participants perform several checks on the analysis using key ratios, and sensitivity and scenario analysis.

Key topics:

• Calculating unlevered free cash flows
  • Drivers of cash flow
  • Ratio analysis
• Weighted average cost of capital
  • Optimal capital structure using peer analysis
  • Establishing the company’s forward looking cost of debt
  • Cost of equity: understanding the risk free rate, the equity risk premium and Beta
  • Unlevering and relevering the beta
  • Calculating WACC for the case company
• Calculating the terminal value
  • Perpetuity growth (Gordon model) method
  • Exit multiple method
• Building a discounting model
• Mid-year adjustments
• Calculating enterprise and equity values
• Sanity checks
  • Reinvestment rate and ROIC
  • Implied multiples and growth rates