Walk me through a DCF
Lay out a clean flow from projecting cash flows through to deriving equity value per share.
Direct answer
Project free cash flow, discount it at WACC, add a terminal value, and bridge enterprise value to equity value per share.
Walk through the structured answer
Project unlevered free cash flow
Start with revenue growth, margin assumptions, and working capital/CapEx to forecast 5–10 years of UFCF.
Calculate the discount rate
Use WACC based on current capital structure, cost of equity (CAPM), and after-tax cost of debt.
Estimate terminal value
Apply either a perpetual growth rate to final year UFCF or an exit multiple to terminal year EBITDA.
Discount and sum
Discount each UFCF and the terminal value back to today using WACC; sum them for enterprise value.
Bridge to equity value
Subtract net debt and preferreds, add non-operating assets to get equity value; divide by diluted shares.
Pitfalls to avoid
- Mixing mid-year and year-end convention without adjusting discount factors.
- Using target capital structure instead of current when valuing a stand-alone company.
- Double counting non-operating assets or including financing cash flows in UFCF.
Follow-up angles
- How sensitive is the valuation to the terminal growth vs. exit multiple?
- When would you prefer mid-year convention?
- What happens to the DCF if working capital turns negative?
Keep drilling the set
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