1. Investment Banking Bootcamp: Week 6 – DCF Valuation Pt 2
Fall 2018

2. Agenda Delving deeper into WACC and CAPM Model Sensitivity Analysis
Mid-Year Convention
Comprehensive DCF Valuation
Intermediate Interview Questions
Please take notes and ask questions throughout. Decks will be available on our website.

3. I. WACC and CAPM Model

4. Recap of WACC

5. Calculate the WACC Fall 2019 April May - June
The bar is to help them visualize what happens!

6. Calculating the Cost of Equity -> CAPM Model
I’m thinking of going deeper into the components (CAPM model etc in Pt 2). Eg. How to calculate Ke & Kd and introducing preferreds etc

7. II. Sensitivity Analysis

8. Remember the Key Drivers of a DCF Valuation?
Terminal Value -> Essentially the EV/EBITDA Multiple you use and the Gordon Growth Rate
WACC -> The assumptions you make regarding Risk Free Rate, Beta and Market Risk Premium
Revenue Growth Rate Assumptions -> The assumptions you make regarding the growth prospects of a company

9. Sensitivity Tables
Since these assumptions change the value of a DCF so much, it makes sense to use a number of different inputs and get a DCF Valuation Range
Excel has a function called data tables, which allow you to change the the inputs to allow a range of different values
Simple example of a data table ->

10. Sensitivity Table in a full DCF Model

11. Football Field Valuation Chart

12. III. Mid-Year Convention

13. Mid-Year Convention
When you use discount periods of 1, 2, 3, 4, and so on, it’s not accurate because those whole numbers imply that the company’s cash flows all arrive at the ends of years. 
But that’s not true: The company generates cash flow every day, and on average, it’s evenly distributed throughout the year. 
So it is more accurate to use discount periods of 0.5, 1.5, 2.5, 3.5, and so on when you’re calculating the cumulative discount factor and the Present Value of Free Cash Flows. 
The company’s Implied Value will increase because the cash flows arrive earlier, and money today is worth more than money tomorrow. 

14. Mid-Year Convention Present Value = Cash Flowt/(1+Discount Rate)^t
The bolded portion is essentially your “discount factor”
Since the cash flows is generated earlier (mid-year instead of end of year), the PV increases! Remember the time value of money -> money today is worth more than money tomorrow
Just understand the high level concept! It is not necessary to apply the mid-year convention when building an actual DCF

15. IV. Comprehensive DCF Valuation

16. Project FCF

17. Calculate WACC

18. Calculate Terminal Value
Fall 2019
April
May - June
The bar is to help them visualize what happens!

19. Discount FCF & Terminal Value
Fall 2019
April
May - June
The bar is to help them visualize what happens!
Can back into Equity Value by using the formula, and then share price by dividing by no of shares outstanding

20. V. Intermediate Interview Questions

21. Intermediate Interview Questions
Conceptually, what is beta?
Why do you relever and unlever beta?
Can beta ever be negative? What does that mean? Give an example
How do you determine a firm’s optimal capital structure?
Which TV Method is better at intrinsically valuing a company? Why?
Why is D&A added back to NOPAT?
If current assets > current liabilities, what happens to UFCF?

22. Thanks so much for coming, and see you next week!