Basics
This financial model estimates the value of an investment based on its expected future cash flows.
What is the Discounted Cash Flow (DCF) model?
This financial statement is typically used as the starting point for projecting future cash flows in a DCF model.
What is the income statement?
This rate is used to bring future cash flows back to their present value in a DCF model.
What is the discount rate?
This ratio compares a company's stock price to its earnings per share.
What is the Price-to-Earnings (P/E) ratio?
This is the value of the operating business available to all investors.
What is enterprise value?
The DCF model is based on this fundamental principle of finance.
What is the time value of money?
This term refers to the cash generated by a company's core business operations.
What is free cash flow?
This financial concept represents the minimum return an investor would accept for investing in a particular asset.
What is the required rate of return?
This valuation metric compares a company's enterprise value to its EBITDA.
What is the EV/EBITDA multiple?
This ratio, important in calculating the discount rate for DCF, measures a company's total debt relative to its equity.
What is the debt-to-equity ratio?
This term refers to the estimated value of a company beyond the forecast period in a DCF model.
What is the time value of money?
This accounting measure is often used as a proxy for cash flow in DCF models.
What is EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)?
This model is commonly used to calculate the cost of equity in DCF valuations.
What is the Capital Asset Pricing Model (CAPM)?
This technique in DCF modeling accounts for different possible outcomes and their probabilities.
What is scenario analysis?
This financial metric represents the percentage of revenue left after covering operating expenses, crucial for projecting future cash flows.
What is the operating margin?
This component of the DCF formula represents the sum of all future cash flows brought to the present.
What is the present value?
This adjustment to net income is made to account for non-cash expenses when calculating cash flow.
What is adding back depreciation and amortization?
This Greek letter represents the sensitivity of a stock's returns to market movements in the CAPM.
What is beta?
This is the discount rate used to discount future cash flows.
What is WACC(Weighted Average Cost of Capital)
This industry's complex financial structures and asset valuations often make DCF less suitable.
What are banking and real estate? (Explanation: Banks main revenue comes from interests, and many real estate firms has high depreciation, which makes it harder to capture the free cash flow)
This assumption in DCF modeling suggests that a company will continue to grow at a steady rate indefinitely.
What is the perpetual growth assumption?
This financial metric represents the cash flow available to all providers of capital, including debt and equity.
What is unlevered free cash flow?
This term refers to the additional return investors expect for investing in stocks rather than risk-free assets.
What is the equity risk premium?
This is the formula for calculating WACC
What is (E/V × Re) + (D/V × Rd × (1 - Tc))?
This is one of the methods used to effectively value companies in industries mentioned above, when using DCF are less suitable.
DDM (Dividend Discount Model), which evaluates a compnay based on their divident payments.