WALL STREET PREP - BUILDING A SIMPLE DISCOUNTED CASH FLOW MODEL

Valuation Date:
Share Price on Valuation Date:
Diluted Shares Outstanding

1/1/2013
$25.00
500.0

Select Operating Data

2010A
$5,300.0

2011A
$5,700.0

2012A
$6,000.0

2013P
$6,600.0
10.0%

Projected Annual Forecast

2014P
2015P
2016P
$7,326.0
$8,205.1
$9,271.8
11.0%
12.0%
13.0%

$2,000.0

$2,080.0

$2,150.0

$2,310.0
35.0%

$2,564.1
35.0%

$2,871.8
35.0%

$3,245.1
35.0%

$3,667.0
35.0%

EBIT
EBIT Margin (%)

1,700.0

1,750.0

1,800.0

$1,980.0
30.0%

$2,197.8
30.0%

$2,461.5
30.0%

$2,781.5
30.0%

$3,143.1
30.0%

Depreciation & Amortization

D&A as a % of revenue

$300.0

$330.0

$350.0

$369.6
5.6%

$388.3
5.3%

$336.4
4.1%

$435.8
4.7%

$461.0
4.4%

Cash
Accounts Receivable
Inventories
Prepaid Expenses

2010A
$700.0
1,100.0
900.0
50.0

2011A
$1,000.0
1,250.0
925.0
63.0

2012A
$1,500.0
1,350.0
935.0
75.0

2013P
1,500.0
1,485.0
949.0
89.7

Projected Annual Forecast

2014P
2015P
2016P
1,500.0
1,500.0
1,500.0
1,648.4
1,846.2
2,086.2
1,001.2
1,092.3
1,200.5
106.5
123.1
139.1

2017P
1,500.0
2,357.4
1,319.3
160.4

Accounts Payable
Accrued Expenses

$930.0
90.0

$960.0
88.0

$1,000.0
93.0

$1,015.0
102.3

$1,070.8
113.6

$1,168.3
127.2

$1,283.9
143.7

$1,411.0
162.4

Debt

2,300.0

4,750.0

4,250.0

4,250.0

4,250.0

4,250.0

4,250.0

4,250.0

455.0

488.0

535.0

588.5

653.2

731.6

826.7

934.2

10.0%
1.5%
19.6%
1.5%
10.0%
10.0%

11.0%
5.5%
18.7%
5.5%
11.0%
11.0%

12.0%
9.1%
15.6%
9.1%
12.0%
12.0%

13.0%
9.9%
13.0%
9.9%
13.0%
13.0%

13.0%
9.9%
15.3%
9.9%
13.0%
13.0%

Revenue
Revenue Growth Rate (%)
EBITDA
EBITDA Margin (%)

2017P
$10,477.1
13.0%

Select Balance Sheet And Other Data

Capital Expenditures
Accounts Receivable Growth (%)
Inventories Growth (%)
Prepaid Expenses Growth (%)
Accounts Payable Growth (%)
Accrued Expenses Growth (%)
Capital Expenditures Growth (%)

Free Cash Flow Buildup

$mm
2010A
Period
Total Revenues
EBITDA
EBIT
Tax rate
EBIAT
Depreciation & Amortization
Accounts receivable
Inventories
Prepaid expenses
Accounts payable
Accrued expenses
Capital expenditures
Unlevered free cash flows
Discount Rate (WACC)
Present value of free cash flows
Sum of present values of FCFs

2011A

2012A

Projected Annual Forecast

2013P
2014P
2015P
2016P
2017P
1
2
3
4
5
$6,600.0
$7,326.0
$8,205.1
$9,271.8
$10,477.1
$2,310.0
$2,564.1
$2,871.8
$3,245.1
$3,667.0
1,980.0
2,197.8
2,461.5
2,781.5
3,143.1
40.0%
40.0%
40.0%
40.0%
40.0%
$1,188.0
$1,318.7
$1,476.9
$1,668.9
$1,885.9
$
369.6 $
388.3 $
336.4 $
435.8 $
461.0
(135.0)
(163.4)
(197.8)
(240.0)
(271.2)
(14.0)
(52.2)
(91.1)
(108.1)
(118.8)
(14.7)
(16.8)
(16.6)
(16.0)
(21.3)
15.0
55.8
97.4
115.7
127.1
9.3
11.3
13.6
16.5
18.7
(53.5)
(64.7)
(78.4)
(95.1)
(107.5)
$1,364.7
$1,477.0
$1,540.5
$1,777.6
$1,973.9
12.0%
12.0%
12.0%
12.0%
12.0%
$1,218.6
$1,177.7
$1,096.9
$1,130.3
$1,120.7

$5,744.3 Stage 1 of the FCF analysis

Terminal Value
Growth in perpetuity method:
Long term growth rate
WACC
Free cash flow (t+1)
Terminal Value
Present Value of Terminal Value

4.0%
12.0%
2,052.8
25,706.3
###

Stage 2 of the FCF analysis

Weighted Average Cost of Capital (WACC)

Share Price
Diluted Shares Outstanding
Cost of Debt
Tax Rate
After-tax Cost of Debt
Cost of Equity

$25.00
500.0
5.2%
40.0%
3.1%
15.0%

Total Debt ($)

Total Equity ($)
Total Capital

$4,250.0
12,500.0
$16,750.0

Debt Weighting
Equity Weighting

25.4%
74.6%

WACC =

12.0%

=rf + B(market risk premium)

Enterprise Value to Equity Value

Enterprise Value
Less: Net debt
Equity Value
Diluted Shares Outstanding
Equity Value Per Share

$20,340.1
2,750.0
$17,590.1
500.0
$35.18

Err:509

Q: If the stock is trading at $25.00 a share and you believe that your DCF analysis is accurate, would you buy or sell stock in this company? Why?
A: Buy, because according to intrisic valuation, stock should actually be valued at $29.99 but market value is $25.00. Therefore, the stock is "cheap."

WALL STREET PREP - FINANCIAL MODELING QUICK LESSON - BUILDING A SI

Valuation Date:
Share Price on Valuation Date:
Diluted Shares Outstanding

1/1/2013
$25.00
500.0

Select Operating Data

Project
2010A
$5,300.0

2011A
$5,700.0

2012A
$6,000.0

2013P
$6,600.0
10.0%

$2,000.0

$2,080.0

$2,150.0

$2,310.0
35.0%

EBIT
EBIT Margin (%)

1,700.0

1,750.0

1,800.0

$1,980.0
30.0%

Depreciation & Amortization

D&A as a % of revenue

$300.0

$330.0

$350.0

$369.6
5.6%

Revenue
Revenue Growth Rate (%)
EBITDA
EBITDA Margin (%)

Select Balance Sheet And Other Data

Project
Cash
Accounts Receivable
Inventories
Prepaid Expenses

2010A
$700.0
1,100.0
900.0
50.0

2011A
$1,000.0
1,250.0
925.0
63.0

2012A
$1,500.0
1,350.0
935.0
75.0

Accounts Payable
Accrued Expenses

$930.0
90.0

$960.0
88.0

$1,000.0
93.0

$1,015.0
102.3

Debt

2,300.0

4,750.0

4,250.0

4,250.0

455.0

488.0

535.0

588.5

Gross PP&E (increases annually be capex)

Accounts Receivable Growth (%)
Inventories Growth (%)
Prepaid Expenses Growth (%)
Accounts Payable Growth (%)
Accrued Expenses Growth (%)
Capital Expenditures Growth (%)

2013P
1,500.0
1,485.0
949.0
89.7

10.0%
1.5%
19.6%
1.5%
10.0%
10.0%

Free Cash Flow Buildup

$mm

Project
2010A

Period

2011A

2012A

2013P
1

Total Revenues
EBITDA
EBIT
Tax rate
EBIAT
Depreciation & Amortization
Accounts receivable
Inventories
Prepaid expenses
Accounts payable
Accrued expenses
Capital expenditures
Unlevered free cash flows
Discount Rate (WACC)
Present value of free cash flows
Sum of present values of FCFs

$6,600.0
2,310.0
1,980.0
40.0%
$1,188.0
369.6
(135.0)
(14.0)
(14.7)
15.0
9.3
(53.5)
$1,364.7
12.0%
$1,218.6
$5,744.3

Terminal Value
Growth in perpetuity method:
Long term growth rate
WACC
Free cash flow (t+1)
Terminal Value
Present Value of Terminal Value

4.0%
12.0%
2,052.8
25,706.3
###

WACC
Share Price
Diluted Shares Outstanding
Cost of Debt
Tax Rate
After-tax Cost of Debt
Cost of Equity

$25.00
500.0
5.2%
40.0%
3.1%
15.0%

Total Debt ($)

Total Equity ($)
Total Capital

$4,250.0
12,500.0
$16,750.0

Debt Weighting
Equity Weighting

25.4%
74.6%

WACC =

12.0%

Enterprise Value to Equity Value

Enterprise Value
Less: Net debt
Equity Value
Diluted Shares Outstanding

$20,340.1
2,750.0
$17,590.1
500.0

Equity Value Per Share

$35.18

Q: If the stock is trading at $25.00 a share and you believe that your DCF analysis is accurate, would you b
A: Buy, because according to intrisic valuation, stock should actually be valued at $29.99 but market value

N - BUILDING A SIMPLE DISCOUNTED CASH FLOW MODEL

Projected Annual Forecast

2014P
2015P
2016P
$7,326.0
$8,205.1
$9,271.8
11.0%
12.0%
13.0%

2017P
$10,477.1
13.0%

$2,564.1
35.0%

$2,871.8
35.0%

$3,245.1
35.0%

$3,667.0
35.0%

$2,197.8
30.0%

$2,461.5
30.0%

$2,781.5
30.0%

$3,143.1
30.0%

$388.3
5.3%

$336.4
4.1%

$435.8
4.7%

$461.0
4.4%

Projected Annual Forecast

2014P
2015P
2016P
1,500.0
1,500.0
1,500.0
1,648.4
1,846.2
2,086.2
1,001.2
1,092.3
1,200.5
106.5
123.1
139.1

2017P
1,500.0
2,357.4
1,319.3
160.4

$1,070.8
113.6

$1,168.3
127.2

$1,283.9
143.7

$1,411.0
162.4

4,250.0

4,250.0

4,250.0

4,250.0

653.2

731.6

826.7

934.2

11.0%
5.5%
18.7%
5.5%
11.0%
11.0%

12.0%
9.1%
15.6%
9.1%
12.0%
12.0%

13.0%
9.9%
13.0%
9.9%
13.0%
13.0%

13.0%
9.9%
15.3%
9.9%
13.0%
13.0%

Projected Annual Forecast

2014P
2015P
2016P
2
3
4

2017P
5

$7,326.0
2,564.1
2,197.8
40.0%
$1,318.7
388.3
(163.4)
(52.2)
(16.8)
55.8
11.3
(64.7)
$1,477.0
12.0%
$1,177.7

$8,205.1
2,871.8
2,461.5
40.0%
$1,476.9
336.4
(197.8)
(91.1)
(16.6)
97.4
13.6
(78.4)
$1,540.5
12.0%
$1,096.9

$9,271.8
3,245.1
2,781.5
40.0%
$1,668.9
435.8
(240.0)
(108.1)
(16.0)
115.7
16.5
(95.1)
$1,777.6
12.0%
$1,130.3

$10,477.1
3,667.0
3,143.1
40.0%
$1,885.9
461.0
(271.2)
(118.8)
(21.3)
127.1
18.7
(107.5)
$1,973.9
12.0%
$1,120.7

s accurate, would you buy or sell stock in this company? Why?

$29.99 but market value is $25.00. Therefore, the stock is "cheap."