as of the present date), the terminal value must also be discounted to the present date by dividing the terminal value by (1 + WACC) ^ Discount Factor. Since the DCF is based on the date of the valuation (i.e. Terminal Value in Final Year = $53 million / (10% – 2.5%) = $705 million.The terminal value in the final year equals the $53 million divided by our 10% WACC minus the 2.5% growth rate. We’ll then multiply the 2.5% growth rate by the final year’s FCF, which comes out to $53 million. Terminal Value Calculation (TV)įor the terminal value calculation, we’ll use the perpetuity growth method and assume a long-term growth rate of 2.5%. Our company’s WACC will be assumed to be 10%, while the discount factor will be the period number minus 0.5, following the mid-year convention.Īfter all the FCFFs are discounted to the current date, the sum of the Stage 1 cash flows equals $161 million. The next step is to discount each FCFF to the present value by dividing the projected amount by (1 + WACC) raised to the discount factor. FCFF = NOPAT + D&A – Capex – Change in NWC.In order to calculate the FCFF for years one to five, we’ll add D&A, subtract capital expenditures, and finally subtract the change in net working capital (NWC). Financial Forecast and Free Cash Flow Calculation (FCFF) “straight-lined”).įrom revenue, we’ll multiply our EBIT margin assumption to calculate EBIT for each period, which will be tax-affected to calculate the net operating profit after taxes ( NOPAT).Ģ. Stage 1 – the assumptions provided above will be kept constant throughout (i.e. Regarding the assumptions necessary to calculate the company’s free cash flow to firm (FCFF), we will use the following inputs:įor the entire free cash flow (FCF) projection period – i.e. Suppose a company generated $100 million in revenue in the trailing twelve months ( TTM) period. ![]() We’ll now move to a modeling exercise, which you can access by filling out the form below. Learn More → Hedge Fund Primer Reverse DCF Model Calculator – Excel Template More specifically, the reverse DCF is designed to remove the bias inherent in all DCF valuation models, and to provide straightforward insights into what the market is predicting. The reverse DCF is less about attempting to accurately project a company’s future performance and more about understanding the underlying assumptions supporting the company’s current market share price. what assumptions are implicitly embedded within the current market valuation of the company. its discount rate), the company’s future FCFs are estimated and can then discounted to the present date.Ī reverse DCF “inverts” the process by beginning with the company’s current share price, rather than the other way around.įrom the market price – the starting point of the reverse DCF – we can determine what set of assumptions are “priced in” to justify the current share price, i.e. Using discretionary assumptions regarding a company’s future growth, profit margins, and risk profile (i.e. In the traditional discounted cash flow model (DCF), the intrinsic value of a company is derived as the sum of the present value of all future free cash flows (FCFs). The Reverse DCF Model attempts to reverse-engineer the current share price of a company to determine the assumptions implied by the market.
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