Discounted Cash Flow

Output for Unlevered DCF

Enterprise Value. subtract net debt to arrive at equity value.

Output Value for Levered DCF

Equity Value. add net debt to arrive at Enterprise Value

Stock Options

issued to pay and motivate employees. affords employees the option to purchase common stock at a given price over an extended period of time.

Operating Assets

long-lived assets that are used by the company in the normal course of operations, with the exception of cash and investment assets.

Operating Liabilities

obligations arising from the firm's primary business operations, with the exception of debt and debt-like liabilities.

Dilutive Securities

options, restricted stock, and other securities that can become common stock (equity).

Preferred Stock Included in Net Debt?

preferred stock that isn't convertible to common should be included in net debt.

Restricted Stock

restricted stock is the other prevalent form of stock based compensation. Employees get shares (or the right to shares) subject to vesting. unlike options, there is no exercise price and employees receive the stock free and clear upon vesting.

Convertible Preferred Stock

similar to convertible debt in that it provides all the benefits of preferred stock (dividends, priority of payments) with a conversion feature that provides upside of equity.

Discount Rate

the acceptable or required rate of return for the investor(s) that is relative to the risk of the investment. Typically, the WACC is used as the discount rate.

Non-Controlling Interests in Net Debt?

the value of the business that belongs to NCIs should be included in net debt. NCI expense should be excluded from the calculation of UFCF (if you start the UFCF calculation with EBIT no adjustment is necessary since EBIT is before NCI expense).

Enterprise Value

total market value of a firm's equity and debt, less the value of its cash and marketable securities. It measures the value of the firm's underlying business. accounts for the value of a firm's operating assets less its operating liabilities. EV = Equity Value + Debt - Cash and Equivalents.

Debt

use the latest book value of a firm's debt, which can be found in its 10K or 10Q.

Relative Valuation

valuing a firm relative to other comparable firms

Terminal Value

Terminal Value (TV) is the value of a business or project beyond the model's forecast period when future cash flows can be estimated. TV assumes a business will grow at a set growth rate forever after the forecast period.

WACC Formula

WACC = ((E/V) x Re + (D/V) x Rd x (1-Tc)) Where: E = Market Value of Firm's Equity D = Market Value of Firm's Debt V = E + D Rd = Cost of Debt Re = Cost of Equity TC = Corporate Tax Rate

Convertible Bond

can be converted into common shares upon a certain strike price. Conversion gives investors the benefit of defined interest payments and upside of equity.

Levered DCF

conducted to find the value of the business to individual equity owners.

Unlevered DCF

conducted to find the value of the operations to all providers of capital.

Intrinsic Valuation

derived from the fundamental analysis of the company's cash flow generation potential (e.g. DCF model)

Market Capitalization

diluted shares outstanding x share price

Unlevered Free Cash Flows are From ...

from the operating performance of the business, BEFORE any effects of leverage or non-operating assets are factored in (before the effect of Debt and Equity holders).

Where to Find Basic Shares Outstanding?

front page of latest filing.

Equity Market Value

(for public firms) share price x shares outstanding

What is the 2-Stage DCF Approach?

1. Project UFCFs with a forecast period that is typically 5-10 years. 2. Calculate the Terminal Value by estimating the value of the company at the end of the first stage, then discounting to back to the firm's present value, using WACC as the discount rate.

Approaches to DCF Modeling

1. value equity (levered DCF) - common for share price analysis. 2. value enterprise (unlevered DCF) - common for EV analysis.

Net Debt

Consists of Debt and Equivalents ... 1. Debt / Capital Leases 2. Non-Controlling Interests 3. Preferred Stock Less Non-Operating Assets 1. Cash & equivalents 2. Other Non-Operating Assets

Discount Rate for Levered DCF

Cost of Equity (CoE) should incorporate the costs of capital to equity investors. The CoE is considered the required rate of return to make an equity investment worthwhile to an investor.

Discount Rate for Unlevered DCF

Typically, the Weighted Average Cost of Capital (WACC). should incorporate the costs of capital to both debt and equity investors. The cost of debt is, essentially, the effective interest rate that a firm pays on its current liabilities to creditors and debt holders.

DCF (discounted cash flow)

a model that values a business as the sum of the cash flows it will generate, discounted to the present, at a rate that reflects the riskiness of the cash flows.