About this model Analytical models

Analytical insig
Most DCF models present value as the sum of the present v
terminal value at the end of this period. The terminal value
highly dependent on the terminal value assumptions and in
other approaches, such as those based solely on valuation
However, the terminal value is also dependent on current p
terminal value as a percentage of total value may give a mi
alternative approach to value analysis, where value is split
materialise.

Cash flow forecasts and DCF valuation

Explicit profit and cash flow forecasts

1 2
NOPAT 100 130

Depreciation and amortisation 60 70

Additional investment in fixed assets -75 -95
Change in net working capital -5 -7
Net increase in invested capital -20 -32

Enterprise free cash flow 80 98

Discount rate (WACC) 9.0%

Present value 429 73 82

Implied incremental ROIC 94%

Terminal value

Medium-term Long-term
Constant growth rate 7.0% 3.0%
Incremental ROIC 15.0% 10.0% Terminal EV/NOPAT multiple
Duration of medium-term growth 5 years

Terminal value - Terminal multiple x year 6 NOPAT 2,363 Implied terminal multiple

DCF valuation

PV of terminal value 1,536 78%

PV explicit forecast cash flows 429 22%
DCF enterprise value 1,965 Implied current EV/NOPAT multiple

DCF value analysis

EV/NOPAT Absolute value
Current profitability 11.1x 1,111
Short-term growth 6.3x 632
Medium-term investment 1.6x 163
Long-term franchise 0.6x 60
19.7x 1,965

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 This model is for general information an

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Analytical insights using DCF value analysis

nt value as the sum of the present value of an explicit forecast of cash flows (typically between 3 and 7 years), plus a
d of this period. The terminal value usually represents a large proportion of the overall value, which in turn is therefore
terminal value assumptions and inputs. The result is that some question the reliability of DCF valuations and prefer
as those based solely on valuation multiples.
alue is also dependent on current profitability and developments in profitability in the short-term. Simply quoting
entage of total value may give a misleading impression about the sources of value. This model demonstrates an
value analysis, where value is split by the period of value creation rather than by when the related cash flows

3 4 5 This enterprise free cash flow DCF model uses a 5 year explicit foreca
from a two-stage value driver calculation.
145 160 170
For more explanation about this approach and other alternative ways
80 90 100 analysis, see our article 'DCF terminal values: Returns, growth and int
terminal value model included therein.
-106 -112 -115
The value analysis shown below does not depend on the specific term
-7 -8 -9 obviously the inclusion of a medium-term stage facilitates a more det
-33 -30 -24
112 130 146

86 92 95

45% 50% 42%

erminal EV/NOPAT multiple
The terminal value in this model is, in part, derived from an assumed
capital (iROIC) in both medium and a long-term periods. An incremen
explicit assumption in deriving the explicit forecast cash flows, but it
changes in NOPAT and reinvestment.
Incremental return on invested capital simply equals the change in N
the change in invested capital. Only if the incremental return is above
a given period.
13.0x Our DCF value analysis approach is derived by constraining one or mo
inputs to the cost of capital.
 Incremental return on invested capital simply equals the change in N
the change in invested capital. Only if the incremental return is above
a given period.
Our DCF value analysis approach is derived by constraining one or mo
inputs to the cost of capital.

At year 5 At year 10
mplied terminal multiple 13.0x 11.7x

Note: This is a simplified model intended for educational purposes on

take into account the timing of the valuation - the assumption is that
of year 1. Nor have we used mid-year discounting. We have also omitt
and hence the model produces only a target enterprise value and doe
mplied current EV/NOPAT multiple 19.7x target stock price.

solute value Percentage

Our DCF value analysis disaggregates a DCF enterprise value, and the
57% multiple, based upon the source of value rather then the timing of th
32% not a different DCF technique - the disaggregation is derived from the
value also has the same sensitivities to the DCF input assumptions as
8%
3% The analysis provides insight into how the DCF value relates to the ke
value creation contributes to the overall value. We also present a sim
100% multiple implied by the DCF value.
Value analysis calculation
Current profitability value: This is the value of the business excluding
future value-adding investment or future efficiency gains. It does not
nently break the chart. rather that any growth arising is achieved through investment at the
neutral. Current profitability value equals the first year forecast NOPA
(WACC).
Short-term growth value: This is the incremental value arising in the
forecast efficiency gains (growth without investment such as margin
added growth due to incremental investment at a return above the c
Medium-term investment value: This is the incremental value arising
the medium-term period in the DCF model. Note: If the terminal valu
stage (constant perpetuity growth) approach then this component of
Long-term franchise value: This is the incremental value arising from
advantage that means it is able to sustain above cost of capital return
In the 'Data' tab of this model you will find the underlying workings f
his model is for general information and education purposes only - see terms of use and disclaimer
 Contact

rs), plus a
n is therefore
and prefer

quoting
es an
ws

ses a 5 year explicit forecast plus a terminal value derived

and other alternative ways to calculate a terminal value in DCF

es: Returns, growth and intangibles' and the illustrative

depend on the specific terminal value calculation, although

stage facilitates a more detailed value analysis.

derived from an assumed incremental return on invested

term periods. An incremental return on capital is not an
forecast cash flows, but it is implied by the assumptions for

ply equals the change in NOPAT in a given period divided by

ncremental return is above the cost of capital is value added in

by constraining one or more of these incremental return

ply equals the change in NOPAT in a given period divided by
ncremental return is above the cost of capital is value added in

by constraining one or more of these incremental return

or educational purposes only. For example, we have not tried to

on - the assumption is that the valuation date is the beginning
ounting. We have also omitted the enterprise to equity bridge
et enterprise value and does not convert this into an implied

F enterprise value, and the associated implied valuation

ather then the timing of the actual cash flows. The approach is
egation is derived from the DCF model above. The overall
DCF input assumptions as the DCF value itself.

DCF value relates to the key inputs and how each period of
alue. We also present a similar disaggregation of the EV/NOPAT

e of the business excluding any value creation arising from

efficiency gains. It does not necessarily imply zero growth but
through investment at the cost of capital and is hence value
he first year forecast NOPAT divided by the discount rate

mental value arising in the explicit forecast period due to

nvestment such as margin enhancements) and from any value-
ent at a return above the cost of capital.
e incremental value arising from value-creating investment in
l. Note: If the terminal value were determined using a single-
ch then this component of value would not be applicable.
emental value arising from the business having a structural
above cost of capital returns in the long-term.
the underlying workings for each of these value components.
Terms of use and disclaimer
Value analysis workings

Value assuming iROIC = WACC in both medium and long-term periods

Explicit profit and cash flow forecasts

1 2
NOPAT 100 130

Depreciation and amortisation 60 70

Additional investment in fixed assets -75 -95
Change in net working capital -5 -7
Net increase in invested capital -20 -32

Enterprise free cash flow 80 98

Discount rate (WACC) 9.0%

Present value 429 73 82

Terminal value

Medium-term Long-term
Constant growth rate 7% 3%
Incremental ROIC 9.0% 9.0% Terminal EV/NOPAT multiple

Duration of medium-term growth 5 years

Terminal value - Terminal multiple x year 6 NOPAT 2,021 Implied terminal multiple

DCF valuation

PV of terminal value 1,314

PV explicit forecast cash flows 429
DCF enterprise value 1,743 Implied current EV/NOPAT multiple

Values based on different iROIC assumptions

1. Value assuming iROIC = WACC in all future periods (NOPAT 1 / WACC)
2. Value assuming iROIC = WACC in medium and long-term periods
3. Value assuming iROIC = WACC in long-term period only
4. Overall value assuming no constraint on iROIC

DCF value analysis

Current operating value (1 above)
Short-term growth value (2 less 1 above)
Medium term investment value (3 less 2 above)
Long-term franchise value (4 less 3 above)
 Value assuming iROIC = WACC in long-term period only

Explicit profit and cash flow forecasts

3 4 5
145 160 170 NOPAT

80 90 100 Depreciation and amortisation

-106 -112 -115 Additional investment in fixed assets
-7 -8 -9 Change in net working capital
-33 -30 -24 Net increase in invested capital

112 130 146 Enterprise free cash flow

Discount rate (WACC) 9.0%

86 92 95 Present value

Terminal value

Medium-term
Constant growth rate 7%
erminal EV/NOPAT multiple 11.1x Incremental ROIC 15.0%

Duration of medium-term growth 5 years

At year 5 At year 10
mplied terminal multiple 11.1x 11.1x Terminal value - Terminal multiple x year 6 NOPAT

DCF valuation

PV of terminal value
PV explicit forecast cash flows
mplied current EV/NOPAT multiple 17.4x DCF enterprise value

The above calculations are the same as the main DCF model except that th
1,111 the terminal value calculations is constrained to be equal to the cost of cap
applies to both medium and long-term periods and in the second to the lo
1,743
We have presented it in this way for educational purposes so that the appr
1,906 practice it is not necessary to repeat the full DCF model in this way and the
1,965 analysis could have been done more directly.

1,111
 632
163
60
1,965
 long-term period only

1 2 3 4 5
100 130 145 160 170

60 70 80 90 100
-75 -95 -106 -112 -115
-5 -7 -7 -8 -9
-20 -32 -33 -30 -24

80 98 112 130 146

429 73 82 86 92 95

Long-term
3.0%
9.0% Terminal EV/NOPAT multiple 12.5x

At year 5 At year 10
2,271 Implied terminal multiple 12.5x 11.1x

1,476
429
1,906 Implied current EV/NOPAT multiple 19.1x

he main DCF model except that the incremental ROIC used in

ned to be equal to the cost of capital. In the first version this
eriods and in the second to the long-term portion only.
cational purposes so that the approach is clear. However, in
full DCF model in this way and the calculations of the DCF value
ctly.