Discounted Cash Flow Valuation

Discounted Cash Flow valuation is one of the three primary techniques of financial valuation used by investment banks

Public Trading Comparables:
• Public trading analysis
• No premium included
• Static analysis/ snapshot in time
Precedent Acquisition Transactions:
• Representative acquisition transactions
• Another static analysis
… Still need a valuation technique to assess the long-term prospects of the target, taking into account the risk profile of the company
Discounted Cash Flow:
• Net present value of free cash flows (over period of model) and an outer year Terminal Value, meant to value the remaining free cash flow not modeled, out into perpetuity.
• Free cash flow = (i) net income plus (ii) non-cash charges (e.g. depreciation, amortization, deferred taxes) less (iii) net change in working capital less (iv) capital expenditures
Benefits of a DCF
• DCF concept is theoretically rigorous, as opposed to simplified ...