1. Discounted Cash Flow (“DCF”)
Section 1
Discounted Cash Flow (“DCF”)

2. PV of projection period
Valuation implied by a DCF model is known as the intrinsic value, as opposed to the market value
Important alternative to market-based valuation techniques such as comparable companies and precedent transactions
Forward looking, focus on cash generation, recognise time value of money
Projected FCF is derived from a variety of assumptions and judgments about its expected financial performance
DCF – Overview
Overview
Free Cash Flow
Income Statement
Earning before interest and tax (“EBIT”)
Less: Taxes (at the Marginal Tax Rate)
= EBIAT
Balance Sheet
Plus: Depreciation and Amortization
Less: Capex
Less: Increase/(Decrease) in NWC
Cash Flow Statement
= FCF
DCF
PV of projection period
PV of terminal value

3. DCF – Key drivers Driver Comment Financial Projections
Management forecasts
Wall Street consensus estimates
Generally helpful when performing DCF based on more than one operating scenario
Equity Risk Premium
Financial and market trends, recommended US equity risk premium (vs. US treasury bond): 5.00% %
Cost of Equity and Weighted Average Cost of Capital (“WACC”)
Equity Beta
Company’s predicted Beta
Historical adjusted Beta, past two or five years, e.g. Bloomberg
Cross check with Beta for peer companies
Capital Structure
Forward looking, or expected Capital Structure
Correspond expected interest rate
Risk-Free Rate
Long-term treasury security as the proxy for risk free rate
Shorter-term can be appropriate if warranted by the circumstance (finite life and no terminal value)
Size Premium
Greater risk for smaller companies, e.g. Ibbotson
Size premium is normally added to the Cost of Equity 3

4. DCF – FCF Calculation

5. DCF – WACC Cost of Equity (re) Cost of Debt (rd) CAPM:
rf : risk-free rate
rm: expected return on the market
SP: size premium
Beta calculation:
Unlevering Beta (peer group):
βL: levered or equity Beta
βU: unlevered Beta
2) Leveraged Beta (target):
rd: long-term cost of debt based on the current yield on its existing term loan
Market interest rate that the firm has to pay on its borrowing. It depends upon three components:
The general level of interest rates
The default premium
The firm’s tax rate
Alternatively, rd can be extrapolated from that of its peers
Beta – measure of the covariance between the rate of return on a company’s stock and the overall market return

6. DCF – WACC Calculation and output

7. Comparable Company Analysis (“Trading Comps”)
Section 2
Comparable Company Analysis (“Trading Comps”)

8. Trading Comps – Identify Key Characteristics
Business Profile
Sector – industry or markets in which a company operates
Products and services – core business model
Customers and end markets – opportunities and risks of underlying markets
Distribution channels – key driver of operating strategy and performance
Geography – different fundamental business drivers and characteristics for different regions
Financial Profile
Size – similar size in a given sector are more likely to have similar multiples
Profitability – ability to convert sales into profit, “margins”
Growth profile – historical and estimated future financial performance
Return on investment – ability to provide earnings to its capital providers
Credit profile – creditworthiness as a borrower
Information can be found on Google Finance (open to all), Bloomberg / Factset / Capital IQ (subscription required) or Competition Sections in company presentations / annual reports
Remember to check valuation date, financials
refer to the same period
(LTM and projected )

9. Trading Comps – Key Matrix
Claim of equity investors
Claim of debt investor
Basic Shares
Outstanding
In-the-Money
Options and Warrants + +
In-the-Money
Convertibles

10. Trading Comps – ConAgra / RalcorpTransaction
Note:
Key multiples for Public Comps:
EV / Revenue
EV / EBITDA
EV / EBIT
P / E
…But why not EV / Net Income?...

11. Precedent Transaction Analysis (“M&A Comps”)
Section 3
Precedent Transaction Analysis (“M&A Comps”)

12. M&A Comps – Points to Note
Source of information?
Public Targets: proxy statements, company fillings, equity and fixed income research reports, press releases
Private targets: depends on type of acquirer and/or acquisition financing
WSJ Deal Journal / Bloomberg / Factset / Capital IQ
Deal Dynamics!
Strategic buyer vs. financial sponsor
Motivations
Sale process and nature of the deal
Purchase consideration
Industry + Geography + Size + Time

13. M&A Comps

14. Football Field – Valuation Summary

15. What do investment banks do?
Corporates
Corporates are companies that actually make products or provide services
Their customers could be other businesses, consumers, or both
Professional services
Consulting firms
City law firms
Audit
Tax
Risk
Give clients strategy advice
Improve management
Technology
Legal aspects of the functioning of their businesses
Disputes with other parties
Corporate finance
Examples:
Markets
M&A: Advise corporates on mergers, sales and purchases of companies and corporate restructuring
Equity: Advise corporates on initial public offerings (IPOs) of shares on a public exchange and further offerings of share
Debt: Advise on loan packages for corporate clients which may be funded by them or institutional investors
Goldman Sachs
Morgan Stanley
JP Morgan
Credit Suisse
Deutsche Bank
UBS
Barclays
Research: Gather and interpret market data for trading or sales colleagues, or for clients
Sales: Advise clients on potential trades, typically institutional investors or corporates
Trading: Trade shares, bonds and other tradable assets with and on behalf of clients, typically institutional investors or corporates
Private equity firms
Asset management firms
Hedge fund managers
Invest money in shares in companies, often taking private control of publicly-listed companies
They aim to improve the businesses they invest in and then sell their stake later for a profit
Invest money entrusted to them by their clients, usually pension funds, insurance companies and retail banks, which hold large pools of individual savings
Tend to stay “long”, that is, they hold assets for the long term
Invest money entrusted to them by various investors
Tend to use a variety of complex investment strategies, including short selling (selling borrowed shares hoping their value will fall before they have to buy them back), using borrowed money, and using derivatives

16. Map of an investment bank
Corporate finance
Markets
M&A
Capital markets
(ECM/DCM)
Loan finance
Trading
Sales
Research
Structured finance
Syndication
Asset management
Specialists in particular products, industries or regions are found across the bank
Product specialists
Industry specialists
Regional specialists
Compliance
Finance
Risk management
Operations IT