![]() To forecast Revenue, analysts gather data about the company, it's customers and the state of the industry. When available, uses analyst forecasts for Revenue as the starting assumptions in a model. The model then deducts cash outflows like Capital Expenditures (CapEx) and Investment in Net Working Capital and adds back non-cash expenses from the Income Statement like Depreciation and Amortization (D&A) to calculate the free cash flow forecast: NOPAT Here is the formula for calculating NOPAT: Revenue The model starts at the top of the Income Statement by creating a forecast for Revenue and then works it's down to Net Operating Profit After Tax (NOPAT). Since future free cash flows can be difficult to estimate directly, the model helps us build up to them. The philosophy behind a DCF analysis argues the value of a company is equal to the expected future cash flows of that company. I've created an Illustrative DCF Model for Verizon that you can use to follow along with this guide: Forecast Net Working Capital Investment.Forecast Depreciation & Amortization Expenses.This guide will walk through a DCF analysis for Facebook that uses a Revenue Multiple to estimate Terminal Value. Since Terminal Value is a critical assumption, offers three options for estimating the value: Gordon Growth approach, EBITDA Multiple and Revenue Multiple. Terminal value represents the future value of a company beyond the projection period.ĭepending on the length of the projection period, it is not uncommon for the Terminal Value to represent 75% or more of the company's total value. Since we can't keep projecting cash flows forever, most DCF models forecast cash flows individually for five or ten years and then estimate a continuing value or Terminal Value. Here is the general formula behind DCF models: Note: If you've read our guides on DCF: Growth Exit Method or DCF: EBITDA Exit Method already, you can skip ahead to the Terminal Value section as you may find other sections of this guide repetitive. DCF analysis is widely used across industries ranging from law to real-estate and of course investment finance. A DCF forecasts cash flows and discounts them using a cost of capital to estimate their value today (present value). Discounted Cash Flow (DCF) analysis is a generic method for of valuing a project, company, or asset. ![]()
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