DCF AnalysisJapinder Nijjer

Slides By: Ashton Wu

UofT Engineering Finance ClubTechnology Sector

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DCF Breakdown1. Input Financial Statements2. Forecast Revenue3. Forecast Free Cash Flows4. Calculate Discount Rate5. Evaluate Fair Value

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Key Drivers

Valuation

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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!!

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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

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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

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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

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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

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Notes for our DCF Spreadsheet

1. Stock Based Compensation inputted in the Financing Portion of the Cash Flow Statement (FS140)

2. Tax rate = Provision for Income Taxes (FS53)/Income Before Taxes (FS52). Make sure this value isn’t far off

3. Depreciation and Amortization values may differ between IS and BS. Cash flow is taken from IS (FS44 & FS45)

4. 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

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Notes for our DCF Spreadsheet

5. 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)

6. Long-term and Short-term Securities is inputted from actual Financial Statements (FS156-FS159), as is most accounts in Financing Activities (FS169-FS172)

7. Compare calculated Cash Flow with actual. Balance Check should not be too large (FS181)

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Key Drivers

Valuation

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Questions or Comments?