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SECTION 1: OVERVIEW DCF in theory and in practice Unlevered vs. levered DCF SECTION 2: MODELING THE DCF Modeling unlevered free cash flows Discounting to reflect stub year and mid-year adjustment Terminal value using growth in perpetuity approach Terminal value using exit multiple approach Calculating net debt Shares outstanding using the treasury stock method Modeling the weighted average cost of capital (WACC) Sensitivity analysis using data tables Modeling synergies
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Start with EBIT The typical starting point for calculating unlevered free cash flows is operating income ***************************** (operating profit before interest and taxes, or EBIT) reported on the SAMPLE PAGES FROM TUTORIAL GUIDE income statement.
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Historical
Income Statement (10-K / 10-Q / PR / Company) Use normalized EBIT Use effective tax rate CFS / IS / Footnotes
Projections
Analyst research Company Internal projections Use marginal tax rate Analyst research Company Internal projections
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Input WACC of 10% for now. ***************************** We will calculate wacc shortly. SAMPLE PAGES FROM TUTORIAL GUIDE For illustrative Purposes Only *****************************
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Mid-year adjustment The mid-year adjustment also applies to the growth in perpetuity formula, which otherwise assumes all future cash flows are generated at year-end.
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Total $ proceeds In-the-$ shares x avg. strike price Calculate option proceeds using the SUMPRODUCT function Total shares repurchased Proceeds / current share price
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Modeling synergies
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