DCF Quick Lesson: Video Tutorial (2-Part Series)
Learn the building blocks of a simple one-page DCF model consistent with the best practices you would find in investment banking. As a side benefit, the DCF is the source of a TON of investment banking interview questions.
Before We Begin, Download the DCF Template
Use the form below to get the Excel model template to follow along with this lesson. (If you've already downloaded the Excel template file from Part 1, you're all good — this lesson uses the same file).
DCF Model, Part 2
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Thank you for the great lesson!
What is the difference between the enterprise value in the DCF model versus the enterprise value that is used in LBO models (market cap + net debt)?
Our DCF derives what we believe the enterprise value to be versus what the market implies it to be. Other than that, they are the same.
Best,
Jeff
You may want to rename row 35 on the DCF exercise tab as it currently shows CapEx rather than PP&E. For anyone not watching your video, they will get to a different conclusion if used as CapEx.
Fed:
Fair enough… good catch!
Best,
Jeff
One question, why did you change to Gross PPE and not Net PPE based on your template. Should we not account for accumulated depreciation?
Hi, Maurice,
Good question. Notice that it is ‘select balance sheet info’, not an actual B/S tracking net PP&E. If you are calculating capex using a forecast of PP&E, it would be the increase in gross PP&E that would give you capex.
BB
Assume today is 1Jan2013, Can I use 31Dec2013 as the year0 and find sum of present value at 31Dec2013, then compare market price of 1Jan2013 with sum of present value at 31Dec2013 to make decision to buy if sum of present value at 31Dec2013 is over market price of 1Jan2013?
Hi, Chai,
Yes, you can do that, but just so you are clear that what you are doing is comparing the price you would have to pay today to what the business will be worth at the end of the year, so you should take that value and discount it back by one year to 1 Jan 2013, because during that time period between 1 Jan and 12 Dec, you could have invested the money in something else.
BB
Still not understanding well, pls explain more. Assume today is 1Jan2013, in case I have 1 year investment horizon to buy and hold this stock and decide or not to purchase on today 1Jan2013 .
Should I compare market price of this stock on 1Jan2013 with sum of present value at 31Dec2013(setting 31Dec2013 as the year0 to find sum of pv at year0). If market price of 1Jan2013 is 30% less than sum of present value at 31Dec2013, I still can expect return 30% after holding from 1Jan2013 to 31Dec2013. Is my methodology right or wrong?
The reason I ask this because I didnt see any equity research paper comparing market price on 1Jan2013 with target price by Dcf valuation on 1Jan2013 to judge buy or sell. On other hand, they will calculate dcf valuation of 12mths target price to compare to stock’s today price. But I’m not sure my opinion is right when matching to Dcf concept.
That’s correct, Chai: If you decided to buy today at a 30% discount to the hypothetical PV you calculate one year from now (based on projections from that point), then you would hope for a 30% return for the year you hold the stock, if your DCF is indeed correct and if the market price of the stock reflects that value in one year. That is what a price target means. The point I am making is that you are implicitly doing an additional 1-year DCF (and so are equity researchers who use price targets), because you are comparing the actual present value today of a hypothetical present value one year from now to the market price today. And to do that in your scenario, you would have to compare the 30% return that you think you will get to your own required rate of return.
BB
Thank you a lot BB for your explaination. This is clearer for me to understand the usage of DCF with determined holding period.
You’re welcome!