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DCF Analysis

UofT Engineering Finance Club Technology Sector. DCF Analysis. Japinder Nijjer Slides By: Ashton Wu. DCF Breakdown. Input Financial Statements Forecast Revenue Forecast Free Cash Flows Calculate Discount Rate Evaluate Fair Value. Input Financial Statements.

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DCF Analysis

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  1. UofT Engineering Finance ClubTechnology Sector DCF Analysis Japinder Nijjer Slides By: Ashton Wu

  2. DCF Breakdown Input Financial Statements Forecast Revenue Forecast Free Cash Flows Calculate Discount Rate Evaluate Fair Value

  3. Input Financial Statements • Input Income Statement and Balance Sheet for previous years • Cells in BLUE require input • Cells in BLACK are calculated • Make sure: • Final Net Income value is correct • Retained Earnings and Additional Paid-In Capital is correct • IT BALANCES!!

  4. Forecast Revenue • We typically forecast for the next 5 years. This can change depending on the size of the company • One of the most if not THE MOST IMPORTANT ASSUMPTION!! • Based on: • Market – contracting/expanding? Overall Performance? • New Products? Other major events? • Historical growth? • Remember revenue will plateau towards a flat-line growth

  5. Forecast Free Cash Flow • Project Free Cash Flow for the next 5 years • FCF = EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure

  6. Calculate Discount Rate • Two Methods: Either based on Historical or Comparable Companies • Cost of Equity (Re) = Rf + Beta (Rm-Rf) • WACC = Re x E/V + Rd x (1 - corporate tax rate) x D/V • Get final unlevered rate

  7. Evaluate Fair Value • Two Methods to calculate Terminal Value: Gordon Growth Model and Exit Multiple Model • Gordon Growth: Assume cash flow of last year stabilizes when projected to infinity • Exit Multiple: Choose a multiplier such as Net Income, Operating Profit, EBITDA, Free Cash Flow • Discount Terminal Value and FCF by WACC to get EV • Subtract Debt (and others) to get Fair Equity Value

  8. Notes for our DCF Spreadsheet Stock Based Compensation inputted in the Financing Portion of the Cash Flow Statement (FS140) Tax rate = Provision for Income Taxes (FS53)/Income Before Taxes (FS52). Make sure this value isn’t far off Depreciation and Amortization values may differ between IS and BS. Cash flow is taken from IS(FS44 & FS45) Cash Plug is used to balance the BS for projected years. Cash Plug = Cash for previous years. Balance Check (FS100) should not be too large

  9. Notes for our DCF Spreadsheet Additional Paid-In Capital and Retained Earnings are calculated for previous years (except first year). Consult Statement of Shareholder’s Equity for miscellaneous differences. (Or input manually) Long-term and Short-term Securities is inputted from actual Financial Statements (FS156-FS159), as is most accounts in Financing Activities (FS169-FS172) Compare calculated Cash Flow with actual. Balance Check should not be too large (FS181)

  10. Questions or Comments?

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