UNDERSTANDING
DISCOUNTED
CASH FLOW (DCF)
ANALYSIS
1 May 2025
Hande Derinkök
AGENDA
1. What is a DCF?
2. Key Steps of DCF analysis
3. Q&A
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1. WHAT IS A DCF?
WHAT IS A DCF?
• It is a valuation method used to estimate the value of an asset based on its future cash flows
• It is an intrinsic valuation method
➢ It relies on the asset’s ability to generate cash flows
➢ It is independent of the external factors
• DCFs are important because…
➢ Probably the best way to find the true value of an asset
• In theory, DCF works great with all cash flow-generating assets…
➢ BUT it is a double-edged sword as it heavily relies on assumptions
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2. KEY STEPS OF
DCF ANALYSIS
5 KEY STEPS
1• Project Future Free Cash Flow (FCF)
2• Calculate the Weighted Average Cost of Capital (WACC)
3• Calculate the Terminal Value (TV)
4• Discount back to Present Value (PV)
5• Calculate the implied share price
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1 PROJECT FUTURE FREE CASH FLOW (FCF)
• There are two common approaches to calculate the free cash flows of a business
1. Unlevered FCF is the cash flow available to both debt and equity holders after the business pays for
everything it needs to continue operating
2. Levered FCF is the cash flow available to equity holders after the business pays for its debt-related
expenses (i.e. interest expense and mandatory debt repayments)
• Unlevered FCF is more commonly used in DCF analysis as it allows valuing the business as a whole
without consideration to its capital structure
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1 PROJECT FUTURE FREE CASH FLOW (FCF)
Unlevered FCF EBIT x (1- Tax Rate) EBIAT
Depreciation & Amortization
Capital Expenditures
Change in Net Working Capital
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1 PROJECT FUTURE FREE CASH FLOW (FCF)
• Project the free cash flows until they reach a steady state
➢ 5 years for mature companies with stable cash flow
➢ 10 years for growth companies that need time to build a sustainable trend
• How do you project the future free cash flows?
➢ Gather historical data to look at trends
➢ Check research analyst estimates
➢ Compare against industry growth
➢ Compare against similar competitors
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2 CALCULATE THE WACC
• What is Weighted Average Cost of Capital (WACC)?
➢ The rate of return required by both debt and equity investors for a company to fund its growth
➢ The discount rate used to determine the present value of future free cash flows of that company
WACC Cost of Debt Cost of Equity
Capital Asset Pricing
Interest rate
Model
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2 CALCULATE THE WACC
WACC (% of Debt x Cost of Debt x (1- Tax rate))
(% of Equity x Cost of Equity)
Risk Free Rate + (Beta x (Expected Market Return – Risk Free Rate))
Capital Asset Pricing Model
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3 CALCULATE THE TERMINAL VALUE
• Terminal Value is the value of a business after the projected period
• There are two common approaches to calculate the terminal value
Perpetuity Growth Exit Multiple
Last year FCF x (1 + Terminal Growth Rate) Last year financial metric x Trading Multiple
WACC – Terminal Growth Rate Financial metric example: EBITDA
Trading Multiple example: EV/EBITDA
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4 DISCOUNT BACK TO PRESENT VALUE
• Discount the projected free cash flows and the terminal value back to the present value using WACC
Discounting FCF Discounting Terminal Value
FCF for Year X Terminal Value
(1+WACC) ^ (Year X) (1+WACC) ^ (Terminal Year)
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5 CALCULATE THE IMPLIED SHARE PRICE
Sum of PV of FCF
PV of Terminal Value
Entreprise Value
Debt
Cash
Equity Value
Shares Outstanding
Implied Share Price
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SUMMARY
• DCF is one of the most common valuation
methods used by finance professionals
• Assumptions are critical in a DCF analysis
➢ Operational assumptions (e.g. revenue growth)
➢ WACC
➢ Terminal growth rate & exit multiple
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3. Q&A
THANK YOU
Hande Derinkök
hderinkok@gmail.com
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