Discounted Cash Flow Calculation and Analysis
In-house
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This practical 2 day course is exploring the DCF valuation method to used to value a project, company or asset. The course starts with an introduction to the principles of valuing cash flows and calculation of discount rates and terminal values.
During the second day the participants will explore the concept of discount rate analysis and the calculation of the cost of capital to move on to more advanced aspects of DCF valuation including terminal value, associates, NCIs, tax and provisions as well as adjusted present value approach.
By the end of this course you will learn:
- To estimate what to invest in and how to finance the investment
- Explore the role of the cost of capital in the valuation of a firm
- The effect of gearing and the use of hybrid instruments on the calculation of the firm's cost of capital
- Build more complex model using: associates, NCIs, provisions and taxation and terminal value approaches
- To explain the fundamentals of the value driver approach to determining terminal value
- To understand the theory and rationale and uses of APV
- To value an entity using APV and prove equivalence with a DCF valuation
Description
Main Topics Covered During This Training
- Principles of valuing cash flows
- Identifying the correct cash flows
- Introduction to discount rates, periods and terminal value
- Explaining the cost of capital
- Cost of debt and equity
- Developing the Capital Asset Pricing Model
- Capital structure analysis
- Calculating WACC
- Using hybrids
- Cost of capital and capital structure in practice
- More complex DCF valuation issues including: associates, NCIs, provisions, taxation and terminal values
- Calculating APV - Adjusted Present Value
- Equivalence between APV and DCF
Who Should Attend
From Corporates, Investment Banks, Private Equity, Consulting, Accounting and Legal Companies:
- Equity Research, Analysts and Sales
- Equity Capital Markets
- Investment Managers
- Members of M&As Departments
- Corporate Financial Managers
- Corporate Development
- Corporate Finance Lawyers
Prerequisites
To attend this course, participants should have:
- An intermediate knowledge of accounting
- Basic modelling skills using Excel
- An understanding of financial modelling and forecasting
- Basic knowledge of principals of corporate finance
- To attend day 3 only you should have mastered the basic two stage approach to DCF valuation who require a more complex modelling approach
Teaching Method
Eureka Financial ensures that:
1. The content of each course is highly practical and build around case studies and computer-based exercises to equip you with the dfc modelling skill set on completion.
2. Small groups (between 5-15 people) which allows you to interact with the trainer and other participants and ask as many questions as you want.*
3. If required, you will receive some support after the course completion.
4. In order to help us establish your individual and business concerns, you will be asked to fill pre-course questionnaire.
5. You will benefit from comprehensive take away course documentation.
* We reserve the right to accept up to 20 people per class.
Because of the nature of the course the number of places is limited and will be filled on first come, first accepted basis. We advise to book in advance in order to avoid disappointment.
Delegates are expected to bring a laptop with Microsoft Excel programme installed. If necessary, we can provide a laptop for an additional fee of £60 + VAT per day or £150 for all 3 days.
DCF Calculation & Analysis - A 2 Day Programme
You can book 1 or 2 days only.
Day 1 - Introduction to DCF Valuation,
Calculating the Cost of Capital
Day 2 - DCF Analysis - Further Concepts
Day 1: Introduction to DCF Valuation ______________________________________________________________
Principles of valuing cash flows
- Discounted cash flow theory and rationale
- Absolute and relative valuation
- Basis of DCF
- Earnings compared to cash flows
- DCF in context
Case study: Case studies testing participants knowledge and modelling skills
Identifying the correct cash flows
- Understanding which cash flows are discounted in valuing a corporate
- Core assets vs. non-core assets
- Free cash flow and NOPAT
- Forecasting free cash flows
- Mid cycle earnings, coping with cyclicality
Case study: Participants calculate NOPAT and FCF from an income statement
Discount rates
- Understanding issues surrounding identifying the correct discount rate
- Which rate to discount at?
- What is WACC?
- Discounting the free cash flows
Case study: Participants calculate the cost of capital for a case company
Terminal values
- Gain understanding of key issues surrounding the terminal value in a discounted cash flow forecast
- How long should the forecast period be?
- What is the terminal value and is it important?
- Terminal value approaches
- Stable growth
- Liquidation value
- Multiples approach
- Terminal value issues
Case study: Participants model the stable growth and multiple approaches to terminal value
Discount periods
- Modelling cash flows that arise outside of a period end
- Intra-period discounting
Bring it together
- Using the discounted cash flow model to build a total value of the firm
- Dealing with core and non-core assets
- Building the bridge between enterprise and equity valuation
Case study: Participants calculate the bridge to link the enterprise value of operations to the total equity value of the firm
Case study: A forecast of case study cash flows is used to calculate the value of a business using the techniques learnt in previous sessions
Cost of capital in context
- Why is the cost of capital important?
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What do we mean by capital?
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Cost of debt
Case study: Which cost of debt?
Cost of equity
- Dividend discounting
-
The Capital Asset Pricing Model (“CAPM”)
Case study: Calculation of the cost of equity using both the dividend discounting and CAPM approaches
Capital structure analysis
- Weighted Average Cost of Capital (“WACC”)
-
Calculation
-
Target capital structure
Case study: Calculation of a WACC of a case study with a target capital structure
Developing the CAPM model
-
What role do betas play in CAPM?
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Betas and gearing
Case study: Calculation of an un-geared and re-geared WACC of a case study company
Hybrids – a revised capital structure
- Treatment of different hybrids
-
Convertible bonds, calculating cost of debt portion and equity portion
Case study: Calculating the cost of a convertible bond for a case company
Cost of capital and capital structure in practice
- Determinants of capital structure in practice
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Cash flow profile
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Asset base
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Investor requirements
-
Debt finance
-
Equity finance
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What are the problems with a CAPM approach?
Case study: Bringing it all together, calculating the cost of capital for a complex capital structure
______________________________________________________________
Day 2: DCF Analysis - Further Concepts
Refresher: Core principles of cash flow valuation and more complex issues
- More complex DCF valuation issues
- Associates, NCIs, provisions and taxation
- What if cash is part of working capital?
Case study: Participants complete the valuation model for more complex valuation issues and deal with cash as working capital
Terminal values
- Competitive advantage and terminal valuation
- Incorporating growth and returns into a terminal value
- More complex terminal value approach
- Value driver formula
Case study: Participants model the stable growth and value driver approaches to terminal value
Background to APV
- The three components of an APV valuation
- Unlevered value
- Value of the tax shield
- Direct and indirect cost of leverage
- How APV compares with a DCF valuation approach
Calculating APV
- The process of calculating APV in a steady state
- Unlevered value – how to calculate and key issues
- Value of the tax shield – which discount rate?
- Direct and indirect costs of leverage – bankruptcy costs, indirect costs and how they can be incorporated
Case study: Calculating APV in a steady state
Coping with growth
- Calculating APV in a steady growth environment
- The value of the tax shield – key assumptions that have to be made
- Equivalence between DCF and APV – how is it achieved?
Case study: Valuation of a company using DCF and APV for equivalence
APV vs. DCF in practice and conclusions for valuation
- The key assumptions to be made in practice with APV
- When are costs of leverage included?
- How is the tax shield discounted?
- Why DCF and APV are rarely the same in practice
- The major issues with a DCF valuation approach
Mike Corless
The course director is a qualified chartered accountant who begun his career in Grant Thornton International and since 1986 worked in Ernst & Young as a senior manager in the corporate advisory team, working on major acquisitions, disposals, IPOs and insolvency/restructuring transactions.
In 1989 he joined Threadneedle Asset Management as an analyst, becoming a fund manager specialising in income funds in 1991. In 1996 he joined Scottish Widows Investment Partnership as a director in the UK Equity team, again specialising in income funds. On becoming head of UK Equities in 1998, he introduced a new investment process incorporating cash flow based corporate valuation techniques. In 2000 he was appointed head of UK Equities when Scottish Widows was acquired by Lloyds Bank and he led the integration of the UK Equity teams.
In 2001 he joined HSBC Asset Management as European Head of Equity Research, managing a team of analysts in Paris and London tasked with developing a new research team and research process.In 2004 he was appointed Global Head of Equity Research, responsible for 60 global equity research analysts and 40 global credit analysts. He developed a global valuation and research process, training local analysts in Europe, the US and Asia in its use.
In 2006 he joined BG Consulting Group, a professional training company, as the head of investment banking and investment management managing a team of 12 trainers. His experience at BG included managing major graduate programmes for investment banking and investment management clients, training graduate to managing director level participants and advising clients on their training requirements for accountancy, corporate finance and valuation, investment management and private wealth training.
His clients have included HSBC, Morgan Stanley, Deutsche Bank, Citigroup, Allen & Overy, JP Morgan, Barclays Bank, Barclays Wealth, Morgan Stanley Investment Management and Schroders.
IN-HOUSE TRAINING
If you have a team of 4 or more this course can be customised and organised in-house at your convenience. Contact one of our advisors to find out more.
Call us now on +44 (0) 207 993 8597
