VALUATION STEPS IN DCF VALUATION

ENTERPRISE VALUATION The 3-step process

Valuing a Firm/Enterprise Step 1: Forecast the amount and timing of future cash flow
The enterprise value is an indicator of how the market attributes How much cash is the project expected to generate and when?
value to a firm as a whole. Enterprise value is a term coined by
analysts to discuss the aggregate value of a company as an INCOME STATEMENT Forecast revenues down to EBIT
BALANCE SHEET Forecast operating assets
enterprise rather than just focusing on its current market
CASH FLOW Forecast finance
capitalization. It measures how much you need to fork out to buy Forecast cash flows
STATEMENT
an entire public company. When sizing up a company, investors
get a clearer picture of real value with EV than with market
capitalization.
Step 2: Estimate a risk-appropriate discount rate
-Forbes
How risky are the future cash flows, and what do investors
PROFESSIONAL SPORTS FRANCHISE VALUATION currently expect to receive for investment of similar risk?
A CASE VALUATION METHOD
Combine the debt and equity discount rate
The NBA is Golden.
= Weighted Average Cost of Capital (WACC)
For the first time in more than two decades, when Forbes began
valuing National Basketball Association teams, a team other
than the New York Knicks or the Los Angeles Lakers is the Step 3: Discount the cash flow
league’s most valuable. This year, the Golden State Warriors
What is the present value “equivalent” of the investment’s
take the top spot, worth $7 billion, 25% more than last year.
expected future cash flows?
During the 2021-22 season, the Warriors generated the most
revenue ($765 million after paying their revenue-sharing check) Discount the FCF using the WACC to estimate the value
and the most operating income ($206 million) in NBA history as of the firm / enterprise / project as a whole.
they won their fourth title in eight years and played their first full
season with fans in the new Chase Center. -Forecast Period
-Forbes -Terminal Value

Generally accepted valuation approaches typically include:

FREE CASH FLOW (Calculating Free Cash Flow)
• The income approach, via the discounted cash flow
method, where the value is estimated based on the Cash Flow (CF) is the increase or decrease in the amount of
cash flows a business can expect to generate over its money a business, institution, or individual has. In finance, the
remaining useful life. term is used to describe the amount of cash (currency) that is
generated or consumed in a given time period.
• The market approach, via the comparable companies
method and the precedent transaction method, where TYPES OFCASH FLOW
the value is estimated based on exchange prices in • EBITDA (EARNINGS BEFORE INTEREST, TAXES,
actual transactions and on asking prices for assets DEPRECIATION AND AMORTIZATION
currently offered for sale. is a metric used to evaluate a company’s operating
• The asset-based approach, where the value is the performance. It can be seen as a loose proxy for cash
estimated net asset value of the business (fair market flow from the entire company’s operations.
value of the assets minus the liabilities). Net Income xxx
Interest xxx
-toptal.com Taxes xxx
Depreciation and Amortization xxx
DCF VALUATION (Estimating EV using DCF)
EBITDA xxx
The value of an investment is determined by the magnitude and
the timing of the cash flows it is expected to generate.
FUTURE CASH FLOW x PV FACTOR
 • Operating Cash Flow
Operating Cash Flow (OCF) is the amount of cash
generated by the regular operating activities of a
business within a specific time period.

Net Income xxx

Depreciation and Amortization xxx
Non-Cash Revenue (xxx)
Non-Cash Expenses xxx
Increase in Net Working Capital (xxx) Free Cash Flow to Firm (FCFF)
Decrease in Net Working Capital xxx
This is a measure that assumes a company has no leverage
OCF xxx
(debt). It is used in financial modeling and valuation
Net Working Capital (NWC) is the difference between a Operating Cash Flow (OCF) xxx
company’s current assets and current liabilities on its balance Interest-net of tax xxx
sheet. It is a measure of a company’s liquidity and its ability to Capital Expenditure (xxx)
meet short-term obligations, as well as fund operations of the FREE CASH FLOW TO FIRM xxx
business.
This is a measure that assumes a company has no leverage
(debt). It is used in financial modeling and valuation
NWC = Current Asset – Current Liability
NWC, ending xxx Net Operating Profit after Tax (NOPAT) xxx
NWC, beginning (xxx) Depreciation Expense xxx
Increase/(Decrease) in NWC xxx | (xxx) Non-Cash Revenue (xxx)
Non-Cash Expense xxx
Increase in NWC (xxx)
Decrease in NWC xxx
CURRENT ASSET Increase in Asset (xxx) Capital Expenditure (xxx)
CURRENT LIABILITY Decrease in Asset xxx FREE CASH FLOW TO FIRM xxx

Increase in Liability xxx

Decrease in Liability (xxx) Net Operating Profit after Tax

CHANGE IN NET WORKING CAPITAL Note: interest expense is not deducted before calculating the
firm’s tax liability. This is because FCFF represent the cash flow
available for both creditors and shareholders
• Free Cash Flow
Sale xxx
Operating Cash Flow (OCF) xxx Cost of Sale (xxx)
Capital Expenditure (xxx) Gross Profit xxx
FREE CASH FLOW xxx Operating Expense (xxx)
EBIT xxx
Taxes (xxx)
TYPES OF FCF: NOPAT xxx
1. Free Cash Flow to Firm (FCFF) -Unlevered
2. Free Cash Flow to Equity (FCFE) -Levered Capital Expenditure (CapEx)
A capital expenditure is the payment with either cash or credit
to purchase long-term physical or fixed assets used in a
business’s operations. The expenditures are capitalized (i.e.,
not expensed directly on a company’s income statement) on the
balance sheet and are considered an investment by a company
in expanding its business.
PPE-net Ending xxx Forecast Period
PPE-net Beginning (xxx)
Change in PPE Balance xxx
Depreciation xxx
Other Non-cash Adjustment xxx | (xxx)
CapEx xxx

Free Cash Flow to Equity (FCFE)

represents the cash that’s available after reinvestment back into
the business (capital expenditures)
Assumption: ALL Cash Flow occur at the end of a forecast
OCF xxx
period
Capital Expenditure (xxx)
Net Debt Issued | (Repaid) xxx | (xxx) Terminal Value
FREE CASH FLOW TO EQUITY xxx
• FCF Terminal Year = FCFn x (1 + g)
• Terminal Value (TV) = FCFn / (WACC-g)
TERMINAL VALUE (FCF beyond the Forecast Period) • PV of TV = Terminal Value x PV factor , n=last
forecast period
Terminal Value – the valueof a business or project beyond the
forecast period. Terminal Value assumes a business will grow Intrinsic Value
at a set growth rate forever after the forecast period.
PV of FCF – Forecast Period xxx
Method 1: PV of Terminal Value xxx
INTRINSIC VALUE xxx
Perpetual Growth • Enterprise Value
The perpetual growth method of calculating a terminal value • Equity Value
formula is the preferred method among academics as it has a
mathematical theory behind it. This method assumes the ENTERPRISE VALUE (Present Value of FCFF)
business will continue to generate Free Cash Flow (FCF) at a
normalized state forever (perpetuity). PV of FCFF – Forecast Period xxx
PV of Terminal Value of FCFF xxx
Enterprise Value xxx
Method 2:
EQUITY VALUE (Present Value of FCFF)

Enterprise Value xxx

Exit Multiple
Debt and Debt Equivalent (xxx)
The exit multiple approach assumes the business is sold for a Non-controlling Interest (xxx)
multiple of some metric (e.g., EBITDA) based on currently Preferred Stock (xxx)
observed comparable trading multiples for similar businesses. Cash and Cash Equivalent xxx
Equity Value xxx
Terminal Value = Financial Metric x Trading Multiple

Normalizing FCFFn

FCFFN = FCF in the final year of forecast period

DISCOUNTING FCF (Present Value of FCF)

PV = FCF x PV Factor