Agenda

Introduction

Discounted Cash Flow Model

Three Financial Statement Model

Three Financial Statement Model (Concepts)

Recognizes the company's income and expenses in each period.

Illustrates the company's assets, liabilities, and equity.

Displays the cash generated from operations, financing, and investment activities.

1.

Income Statement

Balance Sheet

Cash Flow Statement

The goal is to build a model that links the three financial statements together in Excel, allowing you to forecast future years based on your assumptions.

2.

3.

Three Financial Statement Model (Concepts)

To Analyze

To Forecast

To Value

• Understand core business drivers; Revenue Segments, Historical Performance
• Identify cost and margin trends; COGS & Opex as % of Revenue, Margin Expansion
• Evaluate balance sheet strength; Cash Reserves, Working Capital Needs

• Understand how growth will impact cash flow and margins
• Identify risks by testing downside scenarios

• Compare performance to peers; Gross Margins, EBITDA Margins, Revenue Growth
• Determine intrinsic and market value; DCF, Sum of the Parts, P/E Valuation

Understanding the three statements and how to model them is important for three main reasons...​

​

1

2

3

Three Financial Statement Model (Concepts)

Forecasting assumptions should be informed by management guidance, historical financial trends, and industry or market research, ideally using a combination of all three.

Best Practice

• Consider all three to avoid relying to heavily on any single perspective

Key Question to Ask

• “Do my assumptions make sense given how the business actually operates?”

Three Financial Statement Model (Application)

​

Open Model

Discounted Cash Flow (Concepts)

DCF Overview: Estimating the value of an investment based on expected future cash flows, adjusted for Time Value of Money

Discounted Cash Flow (Concepts)

Terminal Value, Two methods relevant to presentation

• Perpetuity Approach: Attaches a constant growth rate (g) onto cash flows of a company after forecast period

*r = WACC

• Exit Multiple Approach: Applies a comps-derived valuation multiple to a metric of the company to estimate terminal value (Ex. EBITDA)

​

​

TV = Financial Metric x Trading Multiple

(i.e EBITDA x 10.0)

​

n = the final year of the projection period (constant)

Discounted Cash Flow (Concepts)

Terminal Value, Key differences:

• Assumes the business grows at a stable, long-term rate
• Best for mature companies with predictable cash flows
• More sensitive to small changes in g and WACC

• Anchors a market trading multiple to the final year
• Relies on valuation of similar companies
• Market comps must be reliable

Key Assumptions:

Multiplied by:

Discounted Cash Flow (Concepts)

How do you determine the appropriate Discount Rate?

WACC

Cost of Equity

Net Income

Revenue - Expenses - D&A

- Interest - Taxes

EBITDA

Net Income + Taxes + Interest

+ Depreciation/Amortization

• EBITDA and Unlevered Free Cash Flow (UFCF) are used to value Enterprise Value
• Enterprise Value represents value available to both debt and equity investors
• These metrics do not subtract interest or debt repayments
• Therefore, they reflect cash flows before debt is paid, attributable to all capital providers

Levered Free Cash Flow

Operating Cash Flow - CapEx

- Debt Repayments

• Levered Free Cash Flow includes interest and debt repayments
• It represents cash flow available only to equity investors
• Because debt has already been serviced, value is after lenders are paid
• Therefore, LFCF is used to determine Equity Value, not Enterprise Value

Discounted Cash Flow (Application)

Open Model