1. Culverhouse Investment Management Group
Discounted Cash Flow Modeling

2. Introduction Intrinsic value of the company
Theoretical vs. relative value
Present value of the cash that company will make in the future
Gotta discount that cash back to today

3. Advantages of a DCF Valuation
Intrinsic valuation gives a theoretical worth
Flexible, adaptable analysis
Can tinker & play
Requires model maker to scrutinize value drivers
Always obtainable

4. Disadvantages of a DCF Valuation
A DCF is only as good as its inputs
This is two-fold:
Your assumptions need to be defendable
More predictable the cash flows, better reliability of DCF
Would you ever rely on a DCF to value Snapchat? What about a super volatile commodity?
Highly sensitive to:
Growth rates and margin assumptions
Terminal growth rate
Discount rate

5. Making Defendable Assumptions
Management
Investor presentations
Earnings Calls
Wall Street Analysts
Bloomberg
Historical Data
Trend analysis

6. DCF Valuation Output

7. So How Do I Build One?

8. Figure Out Your Assumptions

9. Output of Your Assumptions

10. DCF Output

11. Discounting Cash Flows: Weighted Average Cost of Capital
(Cost of Equity x Weight of Equity)+(Cost of Debt x (1-tax rate) x Weight of Debt)
Go to Bloomberg Find your company Type in WACC Use that

12. Discount Projected Cash Flow
/ (1+WACC)^1
/ (1+WACC)^5

13. Terminal Value
We have cash flows projected from : What about 2020-Eternity?
In comes the Terminal Value calculation
Use the Perpetuity Growth Model
Assumes cash flows grow to perpetuity at a constant rate
Inputs required:
Terminal year FCF, WACC, LTGR
Long term growth rate: Generally use between 2% - 3%
Long term GDP growth rate
Terminal Value Formula: (Terminal Year FCF*(1+LTGR))/(WACC-LTGR)
Must discount this value back to present: (Result of Above Calculation/(1+WACC)^(# of years in future we projected (5))

14. Project Terminal Value
Final projected FCF: $517mm
WACC: 9.5%; LTGR 2.5%
Terminal Value = (517*(1+.025))/( ) = $7,563
Discount Terminal Value = 7,563/(1+.095)^5
Terminal Value: $4,804

15. Add! to get Enterprise Value

16. Subtract! to get Equity Value

17. Divide! By Shares Outstanding Compare to Current Stock Price

18. DCF Valuation Output

19. Best Practices and Other Notes
Pull historical finances from 10K
Found on company website
Keep your growth assumptions realistic! Ramp down revenue growth over the projection period
When in doubt, average past percentages of revenue
Don’t get too caught up in being exact. You’re going to be off. Just be sure everything you do has a reason

20. Best Practices and Other Notes
WACC should range from 8%-12%. LTGR: 2%-3%
This is a quantitative analysis. Be sure your company holds up under qualitative AND quantitative scrutiny
Build a DCF over Christmas Break
Info is all over the internet if you get stuck. Pick a simple company that makes sense (Nike, Coach, etc.)
Will have Secretary Jason send you a sample model so you can look at all the calculations