D e r 1 jm gaspar dcf valuation 437 determine length

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DER1
JM Gaspar DCF Valuation 4/37Determine length and detail of the forecast. The forecast horizonmust capture at least a full business cycleConstruct a line‐by‐line forecast of income statements, balancesheets, cash‐flow statements, etc. in a fully linked Excel spreadsheet1.Build the revenue forecasts, based on prospective sales volume, salesprice and product mix.2.Forecast operating items by linking them to revenues via activity orturnover ratios.3.Forecast non‐operating items like long‐term debt and interest expense.4.Forecast equity. Equity should equal previous year equity plus netincome and share issues minus dividends and share repurchases.5.Use the excess cash / debt accounts to plug the balance sheet.6.Check the forecast for internal consistency using ROIC and key ratioanalysis. Go back to step 1 and re‐iterate.This method is called thepercentage sales method, becauseforecasted sales drive most of the projectionThesamesalesforecastmighthavedifferentimplicationsdepending on the industry, due toexcess capacity,economies ofscaleandlumpy assetsForecasting cashflows1. DCF Basics
JM Gaspar DCF Valuation 5/37It is recommended to use nominal cash‐flows (calculated usingcurrent prices as opposed to inflation debased real prices)Follow the rules of incremental cash‐flow calculation1.Cash is king!2.Ignore sunk costs3.Include opportunity benefits and/or opportunity costs4.Don’t forget side‐effects between different areas of the firmCheck for consistency across different assumptionsRecognizeerosionofcompetitiveadvantageandexistenceofbusiness cycles (avoid “hockey stick” effects)Develop a fully linked model with the basic accounting linksSetup the Model1. DCF BasicsSales price growthVolume growthRevenueReceivablesPayablesTerms of paymentRaw material pricegrowthWage growthCapital turnoverCost structureLong‐term fixedassetsOperating workingcapital
JM Gaspar DCF Valuation 6/37Income StatementBalance SheetFinancial Balance Sheet* Fixed assets – Other LT liabilities** Inv. + Acc. Receivable + Op. cash – Acc. payable – Other op. ST debtFree Cash‐Flow Calculation+ Revenues– CGS– SGA= EBITDA– Depreciation= EBIT– Taxes on EBIT+ Depreciation=Operating CF(A)+ Interest Expense after taxInterest income after tax= Net Interest Paid after tax(1)Dividends(2)‐ Financial debt issues+ Financial debt repayments=Net Debt Repaid(3)+ Sales of LT Assets– Acquisitions of LT Assets=CF from Capital Spending(B)‐ Equity issues+ Equity repurchases= Net Equity Repaid(4)+ Decreases in NWC– Increases in NWC=CF from Changes in NWC(C)Changes in Excess Cash(5)Free Cash Flow = (A) + (B) + (C)Financial Flow = (1)+(2)+(3)+(4)+(5)+ Revenues– Cost of goods sold– Selling, gen. and admin. costs= EBITDA– Depreciation= EBIT+ Interest income– Interest expense= Earnings before taxes– Taxes= Net incomeLongterm Assets+ Fixed assetsEquity+ Capital stock+ Retained earningsLongterm liabilities+ Long‐term debtShortterm assets+Other LT liabilities

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