DCF lesson

What makes a business worth anything?

1. Its worth something based on all the future potential cash it can make
Comps give you perspective of what youre paying for in context of
competitors but tells nothing about intrinsic value
Traditional DCFs measure unlevered free cash flow
1. Cash meant to be distributed to people who own the company or lent
money to the company
The path to FCF
1. Revenue: top line growth; sales before considering all the costs
Subtract cost of goods sold (COGS) and operating costs (cost of
doing business)
2. EBIT/operating profit: profit from normal business operations before the
3 claimers to your money (stockholders, lenders, and the government)
3. Subtract taxes
4. Add back depreciation: its a theoretical cost; there isnt any cash
thats moved
5. Subtract capital expenditures: cash spending on infrastructure of
business a.k.a. the main things that keep the physical business running
6. Subtract net working capital: current assets current liabilities
You need a certain amount of cash committed for normal biz
operations
Higher sales tend to require a proportional increase in NWC
Higher sales = more assets to commit to meet demand
7. Tada, the end is pure cash
Removes all the theoretical cash bullshit
How DCF works
1. You project out how much PURE cash a company will make until it hits
a point where pure cash growth stays constant
2. Terminal value
Multiple method: useful if it becomes an acquisition target or a
mature company
Multiples constantly change over time
Gordon growth: the point where cash flow growth stays constant
Should be conservative estimate
Projects out cash flow growth at constant % into infinity
The growth often reflects inflation or US economic growth
Better for companies that have lasting power
WACC and understanding it
1. If you have a higher chance of losing your money, youd want to be
rewarded more for taking the risk
2. WACC helps take into consideration well couldnt my money do better
elsewhere?
If the sum of the DCF is positive, then the company is adding
value
The question is, what am I willing to pay for that value?
3. Companies are funded by lenders and owners (equity)

Lenders and owners take different risks in different proportions

WACC accounts for this
4. CAPM: measures opportunity cost of an owner using historical data
such as
How much the stock moves relative to the market (beta)
Theres levered and unlevered beta which we can go
through another time
Returns of the market (market return)
Risk-less return (risk-free rate)
Enterprise value: sum of all the discounted cash flows
1. Convert to equity value: assume the company pays off every obligation
to every stakeholder in the company other than the common owners
Hence, debt, minority interest, and preferred stock
2. Divide equity value by diluted shares outstanding
3. BOOM done

How get your company information on Bloomberg

-

First go in and login

On the top of the screen, youll see a search bar
Type in your stocks ticker symbol and press Equity (F8) button
1. Select your company on the drop-down list
You should see a menu with a bunch of options for your selected company
Getting your financial statements
1. Click on financial analysis
2. You should be led to a page full of financial figures starting with the
Key Stats tab
3. On the bottom left of the screen, you should see a bunch of arrows
Click the >> symbol until you cant anymore
4. On the bottom right of the screen, you should see the zoom option
Make sure its 75% or less
5. On the top right of the screen, there should be a periodicity and
currency option
Make sure periodicity is annuals and currency is USD
6. On the top middle of the screen, there should be a red bar with one of
the options being output
Click on output and select Excel
Select Current template
An excel sheet should open up with all the figures
7. On the excel sheet, hold ctrl on the keyboard and press a twice
That should highlight the whole sheet
Then press ctrl-c
Right click the sheet and paste values (very important!)
8. Go back to the Bloomberg screen and repeat steps 3 to 7 for the I/S
tab and B/S tab
They should be right next to the Key Stats tab
9. You should now have excel sheets that have historical and projected
figures for your companys financial statements
10.Consolidate those sheets onto 1 Excel workbook

Go back to the search bar and type your companys ticker and equity (F8)
again
1. Select relative valuation option
2. Click on the custom tab
3. Below the tabs, you should see an add column and a search bar next
to it
4. Type in each of the following and press the enter key on the
keyboard after each time
beta
Youll get the option to choose time framejust choose 1
year
current shares outstanding
net debt
Youll have the option to choose time framechoose
latest filing
total debt to total equity
Youll have the option to choose time framechoose
latest filing
WACC cost of debt (after tax)
WACC cost of equity
minority/non controlling interest
Youll have the option to choose time framechoose
latest filing
5. On the top middle of the screen, there should be a red bar with one of
the options being output
Click on output and select Excel
An excel sheet should open up with all the figures
6. On the excel sheet, hold ctrl on the keyboard and press a twice
That should highlight the whole sheet
Then press ctrl-c
Right click the sheet and paste values (very important!)
Congrats! You should have all the relevant figures to create your DCF (which
we will discuss next meeting)