The DCF Model: The Complete Guide… to a Historical Relic?

For the full written version and Excel files, please see:

Table of Contents:

0:00 Introduction

2:29 Part 1: The Big Idea Behind a DCF

5:21 Part 2: Company/Industry Research

8:36 Part 3: DCF, Step 1: Unlevered Free Cash Flow

21:46 Part 4: DCF, Step 2: The Discount Rate

28:46 Part 5: DCF, Step 3: The Terminal Value

34:15 Part 6: Common Criticisms of the DCF – and Responses

39:09 Recap and Summary

[financialmodeling]

Note that this is an OVERVIEW video of the DCF modeling process. Since it is an overview, of course, we do not go into each step in excruciating detail. Yes, I know the part on the Discount Rate is short. That is intentional because it would have taken 1 hour+ to explain the full process. The goal here was to give you a short, free method you can use to approximate it.

If you want more on any step of the process, please see the recommended resources in the accompanying articles and the other examples on both sites and this channel:

[blacknoteinvestment]

One of the few investing channel that actually gives value to viewers and helps them become better investors, thanks.

[IvanIB-mdhj]

Thank you so much. This was EXTREMELY helpful.
I'm in my 2nd year of Uni, and around two weeks ago I participated in an investment banking case competition with literally ZERO IB knowledge. I dedicated myself to intensive preparation, and ended up winning first place!


I have an upcoming interview with TD Securities based on that case competition win, and your videos and website have been so helpful I can't even explain. If I land this summer role I'll be forever indebted to you

[juhwapark]

cant believe I just discovered you! my life would have been in such a better condition if i found your channel during my college years. thank you very much. :) you da best

[yohanmalet]

Hands down the best YouTube channel for finance-related videos. Thank you for making so much knowledge available to everyone !

[danzz]

The quality of your lesson inspires me to do better, no cap. Excellent stuff

[chiragdalal]

A great video where you have covered all the necessary points. I just have one issue with it at 31:40 mins. To check the EBITDA multiple as per the perpetuity method in TV, you divide the TV by EBITDA and get 12.3x. Now to find the TV using EBITDA multiple, we must use a computed EBITDA multiple from the market and not merely pick up the 12.3x that we calculated in the previous method. Because if you do that, you are essentially just saying that x*y=z, therefore x=z/y. If we have a multiple computed using comparables, then we apply the said multiple to the EBITDA of the last year which results in the save TV using Multiples method and Perpetuity, that is when we can confirm that both our methods draw the same results. Hope makes sense. Happy to connect via email to discuss.

[orjihvy]

This is really practical and well explained.

[johnlau]

Very detailed DCF model and thanks for the template as well. Can you tell us more about how you project the growth of the financial metrics here? Using its history, or analyst report? Especially it dsnt change linearly with time. Such as the projected growth rate of retail sqaure feet, it changes in 0.5% increment with 0.5% per 2 year at first, and completely stops for the last four years. I am really curious on how you decided this pattern.

[chika]

Thank you for sharing this! I love all your contents!

[Kaddikt]

hi! this is a great video that has definitely improved my understand of DCF! thanks! I wanna know why do you use the historical average to get the effective tax rate instead of using the current corporate tax rate? thank you

[kurado]

Very informative video.. I love it. Thank you so much!

[shocktrop]

How did you find the net operating losses of $9179? Can't find this on your reference material

[WhiteCarBlackWheels]

the pre-tax cost of debt formula gave me 5 secs of anxiety haha! great work as always, thanks for keeping us informed. tho much easier way of analyzing a company than this is just buying whatever wallstreetbets tells us to buy...

[cristianojunior]

Hey, thanks for the video! It was very helpfull. One question: if we use a 3-financial-statement model to project the cash flows, would we get a more precise result? Usually I use the 3-statement-financial model when doing a DCF, but this looks way more practical and less time consuming.

[MrJhunter]

For implied terminal multiple, if you were using mid-year convention, would the revised formula be Implied Exit Multiple = (PGM Terminal Value x (1 + WACC) ^ 0.5) / LTM EBITDA? I think you need to grow the PGM-derived terminal value by the discount rate for half a period to make it apples to apples to the multiples method (under mid-year convention)

[civirus]

How come the cost of debt is the yield?

The yield is what debt holders earn considering they reinvest the proceeds, therefore how can that reinvestment assumption also be applied to debt issuers

[himanshuverma]

Hi, to calculate EBIT, why haven't you deducted D&A from sales, is it assumed to be a part of Opex??

[domvk]

If in the denumerator for Enterprise Value, Operating Leases are added, why in the corresponding numerator is the operating lease expense deducted to arrive at thr FCFF?

[KrishanSingh-gzop]

I have two questions related to beta
Question1:- The formula for linear regression is Y=b0+ b1X+ €
Where b0 is the y-intercept; b1 is the slope; & € is the error. Which one represents the beta?

Question 2:- Why is the beta calculated using regression, or covariance/variance method; or the slope method is Levered beta.? We never added or calculated the debt of the company in our beta calculation. We just downloaded the stock & market returns data of previous years & loaded it on the excel & applied the formulas for beta calculation. So how it became Levered OR why the beta calculated using above methods is called as levered?