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DCF Model, Part 2

Last Updated December 6, 2023

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DCF Quick Lesson: Video Tutorial (2-Part Series)

Learn the building blocks of a simple one-page DCF model consistent with the best practices you would find in investment banking. As a side benefit, the DCF is the source of a TON of investment banking interview questions.

(Click here for part 1)

Before We Begin, Download the DCF Template

Use the form below to get the Excel model template to follow along with this lesson. (If you’ve already downloaded the Excel template file from Part 1, you’re all good — this lesson uses the same file).

DCF Model, Part 2

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Chai
November 10, 2022 12:27 am

Assume today is 1Jan2013, Can I use 31Dec2013 as the year0 and find sum of present value at 31Dec2013, then compare market price of 1Jan2013 with sum of present value at 31Dec2013 to make decision to buy if sum of present value at 31Dec2013 is over market price of 1Jan2013?

Brad Barlow
November 11, 2022 3:22 pm
Reply to  Chai

Hi, Chai, Yes, you can do that, but just so you are clear that what you are doing is comparing the price you would have to pay today to what the business will be worth at the end of the year, so you should take that value and discount it… Read more »

Chai
November 11, 2022 11:28 pm
Reply to  Brad Barlow

Still not understanding well, pls explain more. Assume today is 1Jan2013, in case I have 1 year investment horizon to buy and hold this stock and decide or not to purchase on today 1Jan2013 . Should I compare market price of this stock on 1Jan2013 with sum of present value… Read more »

Brad Barlow
November 14, 2022 2:40 pm
Reply to  Chai

That’s correct, Chai: If you decided to buy today at a 30% discount to the hypothetical PV you calculate one year from now (based on projections from that point), then you would hope for a 30% return for the year you hold the stock, if your DCF is indeed correct… Read more »

Chaiy
November 15, 2022 11:36 pm
Reply to  Brad Barlow

Thank you a lot BB for your explaination. This is clearer for me to understand the usage of DCF with determined holding period.

Brad Barlow
November 16, 2022 11:27 am
Reply to  Chaiy

You’re welcome!

Fed
October 8, 2021 9:40 am

You may want to rename row 35 on the DCF exercise tab as it currently shows CapEx rather than PP&E. For anyone not watching your video, they will get to a different conclusion if used as CapEx.

Jeff Schmidt
October 8, 2021 11:36 am
Reply to  Fed

Fed:

Fair enough… good catch!

Best,
Jeff

Maurice
November 22, 2023 12:31 am
Reply to  Fed

One question, why did you change to Gross PPE and not Net PPE based on your template. Should we not account for accumulated depreciation?

Brad Barlow
November 24, 2023 1:47 pm
Reply to  Maurice

Hi, Maurice,

Good question. Notice that it is ‘select balance sheet info’, not an actual B/S tracking net PP&E. If you are calculating capex using a forecast of PP&E, it would be the increase in gross PP&E that would give you capex.

BB

Liability
December 17, 2020 8:36 pm

What is the difference between the enterprise value in the DCF model versus the enterprise value that is used in LBO models (market cap + net debt)?

Jeff Schmidt
December 18, 2020 9:01 am
Reply to  Liability

Our DCF derives what we believe the enterprise value to be versus what the market implies it to be. Other than that, they are the same.

Best,
Jeff

Liability
December 17, 2020 8:08 pm

Thank you for the great lesson!

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