Next, add the effect of dilutive shares. Assuming that we calculated 50 million dilutive securities for Apple, we can now put all the pieces together and complete the analysis:. What were the key assumptions that led us to the value we arrived at? The three key assumptions in a DCF model are:. Each of these assumptions is critical to getting an accurate model. In fact, the DCF model's sensitivity to these assumptions, and the lack of confidence finance professionals have in these assumptions, especially the WACC and terminal value is frequently cited as the main weaknesses of the DCF model.
Nonetheless, the DCF model is one of the most common models used by investment bankers and other finance professionals, and the DCF output is almost always presented using a range of terminal value and WACC assumptions, as well as in context to other valuation methodologies.
A common way this is presented is using a football field valuation matrix. There is no explicit rate listed other than the discount rate I want to get some sort of rate, so that I can calculate a weighted cost of debt. Black-Scholes converted for Binomial Tree Converts the standard deviation input in the Black-Scholes model to up and down movements in the binomial tree.
Download the EPUB available to members. We were not able to record your PL credits. The input affects the field highlighted in the screenshot below:. After you enter the revenue, future revenue will automatically be calculated based on short-term and long-term revenue growth rate.
The rate calculated above is applied to the projected revenue calculated in the previous section to arrive at the EBITDA figures in the future years. This will further be adjusted to arrive at the net cash flows. After having calculated the tax, figure of depreciation and amortization will again be added back to the cash flow, as this is a non-cash item. You can view the capital expenditure figure from the cash flow statement of the previous year and that is taken as the basis for future projections.
The amount will then be converted as a percentage of sales and applied to the future revenue figures to arrive at the projected capital expenditure figures. Similarly, the change in operating assets and liabilities represents non-cash current assets and liabilities like accounts receivables and inventory and are treated in the same way as changes in working capital.
The sensitivity factor will then be applied to the discount rate showcasing the three different scenarios. This can be illustrated using an example.
Find the intrinsic value of the company's share. In FCFE valuation model, we need to discount the free cash flow to equity at the cost of equity k e :. These programs are broadly categorized into those that Estimate risk in an investment and its hurdle rate, as well as assess investment returns net present value, internal rate of return, accounting return Evaluate the right mix of debt and equity in a business and the right type of debt for a firm Examine how much a firm should return to investors and in what form dividends versus buybacks Valuation Inputs Spreadsheets : In this section, you will find spreadsheets that allow you to Estimate the right discount rate to use for your firm, starting with the risk premium in your cost of equity and concluding with the cost of capital for your firm.
Big-picture valuation spreadsheets : If you are looking for one spreadsheet to help you in valuing a company, I would recommend one of these 'ginzu' spreadsheets. While they require a large number of inputs, they are flexible enough to allow you to value just about any company. If you have no idea which one will work for you, I would suggest that you try the "right model" spreadsheet first. Focused valuation spreadsheets : If you have a clear choice in terms of models - stable growth dividend discount, 2-stage FCFE etc.
Valuation of specific types of companies: Valuation is all about exceptions, and these spreadsheets are designed to help value specific types of companies including: Financial Service firms : While dividend discount models tend to be the weapon of choice for many, you will find an excess equity return model here.
Troubled firms : You will find an earnings normalizer spreadsheet, a generic valuation model for valuing a firm as a going concern and a spreadsheet that allows you to estimate the probability that a troubled firm will not survive.
Private companies : You will find spreadsheets for adjusting discount rates and estimating illiquidity discounts for private companies. Young and high-growth firms : You will find a revenue growth estimator as well as a generic valuation model for high growth firms in this section.
Multiples : You can estimate equity as well as firm value multiples, based upon fundamentals. Valuation in Acquisitions : You can value synergy in an acquiisition and analyze a leveraged buyout. Valuation of other assets : In this section, you will find a model for valuing income-generating real estate. Basic option pricing models : In this seciton, you will find Black-Scholes models for valuing short term options, long term options and options that result in dilution of stock such as warrants.