Building an Institutional Discounted Cash Flow Model
A comprehensive walkthrough on project cash flows, selecting terminal growth rates, and applying appropriate exit multiples to derive intrinsic valuation.
Understanding Discounted Cash Flow Valuation
A discounted cash flow (DCF) model is a financial tool used to estimate the value of an investment based on its future cash flows. The model projects free cash flows into the future and discounts them back to the present value using an appropriate discount rate (often WACC).
Gordon Growth vs Exit Multiples
Analysts establish terminal values using two primary methods: the Gordon Growth Perpetual Model (which assumes free cash flows grow at a constant rate forever) and the EBITDA Exit Multiple Approach (applying a multiple to terminal year EBITDA). Both methods require careful reconciliation to ensure capital budgeting consistency.
Put This Theory Into Practice
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