DCF and multiples valuation, cash conversion cycle, inventory, receivables and short-term financing.
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- What is the primary objective of discounted cash flow (DCF) valuation?
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To estimate a company's intrinsic value by projecting future cash flows and discounting them to present value.- Name the three main components of a DCF valuation model.
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Explicit forecast period, terminal value, and discount rate (WACC).- What does terminal value represent in DCF?
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The value of all cash flows beyond the explicit forecast period, typically estimated using perpetuity or exit multiple methods.- What is WACC and why is it the appropriate discount rate in DCF?
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Weighted average cost of capital; it reflects the blended cost of all capital sources and represents the minimum return required by all investors.- Define free cash flow to the firm (FCFF).
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Operating cash flow available to all investors (debt and equity holders) after capital expenditures and investments in working capital.- How does raising the discount rate affect a DCF valuation?
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It decreases the present value of all future cash flows, resulting in a lower intrinsic value estimate.- What is a typical length for the explicit forecast period in a DCF analysis?
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5 to 10 years, depending on the industry and company's competitive position.- What economic assumption underlies the terminal growth rate in perpetuity?
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That the company's growth will eventually converge to the long-term GDP or inflation growth rate.- State the perpetuity growth method formula for terminal value.
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Terminal Value = Final Year FCF × (1 + g) / (WACC - g), where g is the perpetual growth rate.- What is the key difference between FCFE and FCFF?
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FCFE is cash available to equity holders only (after debt payments), while FCFF is available to all investors before debt service.- Define the P/E ratio and state its primary use.
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Price per share divided by earnings per share; used to compare relative valuations across companies or assess if a stock is cheap or expensive.- What does the EV/EBITDA multiple measure?
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Enterprise value relative to earnings before interest, taxes, depreciation and amortization; less sensitive to capital structure and accounting choices than P/E.- What is the price-to-book (P/B) ratio primarily used to evaluate?
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Asset-heavy industries and financial institutions where book value is meaningful; reflects the market's assessment of return on equity.- What is enterprise value and how is it calculated?
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The total economic value of a firm; calculated as Market Cap + Total Debt - Cash and Cash Equivalents.- Distinguish between trailing and forward multiples.
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Trailing multiples use historical 12-month results, while forward multiples use projected future results (next 12 months or full year ahead).
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