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Discounted Cash Flow valuation or DCF valuation is a topic every MBA student will encounter in an MBA or CFA program. Therefore, as tutors to CFA and MBA students worldwide, it is not surprising that we get many requests to tutor students on DCF or discounted cash flow valuation models. We summarize over a decade of experience teaching DCF valuation into a book titled “The ABCs of DCF Valuation & Modeling”. In this book, we walk you through the entire process of DCF modeling starting from the underlying concepts and theory of valuation.

Who is the ‘The ABCs of DCF Modeling’ book for?

This book, The ABCs of DCF Modeling is for anyone interested in understanding and using the discounted cash-flow valuation method to value assets. Although primarily written for MBA and undergraduate business students, anyone interested in understanding discounted cash-flow valuation will find this book useful.

This book is an introductory level book. As the title indicates with the word ‘ABCs’, this book is meant for beginners trying to understand and build a DCF valuation model in Microsoft Excel or Google Sheets. If you are looking for an advanced book on valuation, we recommend McKinsey & Company’s book ‘Valuation: Measuring and Managing the Value of Companies written by Tim Koller, Marc Goedhart and David Wessels or ‘Investment Valuation: Tools and Techniques for Determining the Value of Any Asset’ written by Professor Aswath Damodaran.

This book assumes that the reader is familiar with basic accounting and finance concepts. For example, the reader is expected to know the structure of an income statement, the meaning of the term “working capital”, etc. We will cover some of these concepts only briefly as the focus is on the DCF valuation model. The reader is NOT expected to be an expert in Microsoft Excel or Google Sheets but must be reasonably familiar with these tools. 

This book will teach you how to build a simple DCF model. Once you can confidently build a simple DCF model, you can add many bells and whistles to make your model more detailed. Our focus is on helping you understand the foundations of building a good DCF model.The ABCs of DCF Modeling is based on Senith Mathews’ experience tutoring students and executives in DCF modeling over 10 years and building models as a management consultant with Arthur Andersen and Mercer Management Consulting (now Oliver Wyman). The ABCs of DCF Modeling narrowly focusses on teaching readers how to build a basic DCF model in a spreadsheet. It does not go in depth into the underlying finance and accounting concepts or rules.

This book will teach you how to build a simple DCF model. Once you can confidently build a simple DCF model, you can add many bells and whistles to make your model more detailed. Our focus is on helping you understand the foundations of building a good DCF model well.

How to use this book?

The ABCs of DCF Modeling is built on our modeling boot camp experience and so it is best you adopt a hands-on boot camp attitude as you read this book. This will help you maximize your learning from this book. You should be confident of building a basic DCF model on your own in an hour after working through this book. You should read this book at least twice to really understand how to build a basic DCF model.

Your first read is meant to give you a quick overview of the entire process. You should follow the model spreadsheet as you progress through the book. Read each section one by one. Once you have read a section, review the corresponding region in the Microsoft Excel model. Change the relevant input assumptions to see how that section changes. Dig into each cell of the Microsoft Excel model row by row so you understand the formula and relationships section by section.

Your second read is when you should open the blank workbook and build the exact DCF valuation model yourself. We recommend that you re-read the book from the beginning. As you re-read each section re-create that section in a blank workbook. Begin by setting up the same input assumptions and build the projected financial statement section by section. Check each section of your model and proceed to the next section only after you are sure it reflects the sample model. Your final model should reflect the sample model when you are done. Change the relevant input assumptions in your model to check that the model returns reflect the changes throughout the entire model.

Building a DCF valuation model from scratch should give you the confidence to build a DCF valuation model on your own. Now you are ready to value a business or company using the DCF valuation method. Don’t stop there. Practice as much as you can on real companies. We recommend you work on these valuation exercises with a friend or a tutor so that you get instant feedback. Good timely feedback boosts your learning process tremendously.

Enjoy learning!

PS: You may also enjoy the following two books on financial modeling from the ‘Simplified’ series: