Year 2 · Core Finance · Corporate Finance & Valuation
DCF & Relative Valuation
Build a complete valuation bridge from operating forecasts to free cash flow, WACC, terminal value, enterprise value, equity value and price per share — then triangulate the result with trading comparables and precedent transactions.
LEARNING OBJECTIVES
What you should be able to explain after this lesson
01
Build a DCF from operating assumptions through free cash flow and present value.
02
Calculate FCFF and distinguish it from FCFE.
03
Apply WACC consistently to enterprise cash flows.
04
Calculate terminal value using perpetual growth and exit-multiple methods.
05
Bridge enterprise value to equity value and diluted value per share.
06
Use trading comparables, precedent transactions and sensitivity ranges to triangulate valuation.
CONCEPT MAPThe valuation build
Match the cash flow with the correct discount rate and value level
CORE FACTS · SAME IN EVERY MODE
FCFF is cash flow available to all providers of capital before discretionary debt payments and is discounted at WACC to enterprise value.
FCFE is cash flow available to common equity holders after financing effects and is discounted at the cost of equity to equity value.
Enterprise value and equity value are different claim levels and should not be mixed within one DCF.
The most common corporate DCF framework forecasts FCFF, discounts it at WACC and then bridges enterprise value to equity value.
BeginnerTeaching style changes, knowledge does not.
Think of FCFF as cash generated by the operations before deciding how debt and equity divide the value. Discounting FCFF therefore gives the value of the whole operating business. Only after that do you subtract debt-like claims and add non-operating assets to reach shareholder value.
COMPARISON
Cash-flow matching
| Cash flow | Discount rate | Value obtained |
|---|---|---|
| FCFF | WACC | Enterprise value |
| FCFE | Cost of equity | Equity value |
PROFESSIONAL VOCABULARYFCFF / free cash flow to firm / FCFF FCFE / free cash flow to equity / FCFE
Cash flow available to debt and equity capital providers before discretionary financing flows.
Cash flow available to common equity after debt financing effects under a stated definition.