This page lists recent articles related to corporate finance on this website.
It is important to get the terminal value estimate right because the terminal value accounts for a large part of firm value. The terminal value as a percentage of firm value could be anywhere from 50-80% and can be estimated using a number of ways.
We address this question here. “What are the different ways you can estimate terminal value in a DCF valuation?”
The terminal value accounts for a large part of firm value. The terminal value as a percentage of firm value could be anywhere from 50-80%. If your terminal value is higher than 80% of the firm value, it will be considered on the higher side and you will need to explain why.
We address, on this page, the question: “What factors drives the percentage of your total value the terminal value represents?”
You need the value of debt and equity to build a DCF valuation model. Why and when is there a need to iterate on the value of debt and equity in a DCF valuation?
We address this question in this post. “When do you need to iterate on the value of debt and equity in a DCF valuation??
There is no right answer. How do you check if you are on the right track? Why is this important? The terminal value as a percentage of firm value could be anywhere from 50-80% usually. The terminal value as a percentage of firm value could be lower or higher under specific conditions too. Look at the terminal value as a percentage of firm value to make sure your DCF is not too dependent on future projections of terminal cash flow.
How else can you check if your terminal assumptions are reasonable?
The reinvestment rate measures how much a firm is plowing back to generate future growth. So clearly the reinvestment rate matters for growth. How does the reinvestment rate correlate with growth and therefore with the value of a business? We explore how the reinvestment rate impacts the value of a business in DCF valuation in this article in the specific condition that the business is NOT profitable.
How does the reinvestment rate impact the value of a business in DCF valuation when the business is NOT profitable?
You are estimating working capital to arrive at the free cash flows of the business. What type of current assets are considered as part of current assets when computing working capital?
Multiple tax rates apply to a company. Federal /state statutory tax rates, Effective tax rates, marginal tax rates, etc. What tax rates apply to a company you are considering valuing depends on the specifics. Here are some you must definitely consider.
The present value concept discounts the cash flows of a period by the entire period using the discount rate. The DCF valuation method relies on the present value concept to value the cash flows of a business. Therefore the DCF valuation method also discounts the cash flows of a period by the entire period using the discount rate. This assumption may be an appropriate reflection of reality for most companies. But not all companies. For some companies, the midyear convention is not appropriate. We this when the midyear convention is not appropriate on this page.
First, we must appreciate that there is a difference between depreciation and amortization cash flows as computed in the IRS code/tax books or those reported in the financial accounting/reporting books. Now we can discuss, which of these must be factored into our DCF valuation model.
If you had access to depreciation and amortization cash flows as computed in the IRS code/tax books or those reported in the financial accounting/reporting books choice, which one would you prefer to use?
How will your DCF model change if your company pays for acquisitions using cash, stock or both? The free cash flow of a company is lower if a company pays for acquisitions with cash. The free cash flow will be higher if it pays using stock.
We address its question here: “How does it matter if the company pays for acquisitions using cash, stock or both when estimating cash flows for a valuation?”