Your Company Is Worth As Much As Somebody Else Is Willing to Pay For It

Types of DCF Models

There are several types of DCF valuation models, depending on the type of free cash-flows used, such as discounted cash-flow model using either free cash-flows to firm (FCFF) or free cash-flows to equity (FCFE) and discounted dividend model (DDM) that uses only projected dividends. In most industrial sectors and in most situations it is more common to use free cash-flows to firm but in the banking industry the free cash-flow to equity is the right choice. Then depending on the type of cash-flow you decide to use different methods of estimating the discount factors are applied. For FCFE and DDM the cost of equity is used whereas for FCFF a more complicated approach of estimating the cost of capital (the blended cost of equity and debt) will ne required. Some models that use the cost of equity as their discount factor apply a constant discount rate for the whole forecast period whereas others use dynamically changing values.

FCFF Calculation

NOPAT Operating Income x (1 – Tax Rate)
Depreciation & Amortization Positive item
Capital Expenditure Negative item
Change in Working Capital Increase is a negative item
   

FCFE Calculation

Net Profit After Tax Profit
Depreciation & Amortization Positive item
Capital Expenditure Negative item
Change in Working Capital Increase is a negative item
Change in Bank Debt Increase is a positive item
   

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