Discounted Cash Flow (DCF) Model
1. Revenue & Growth Rates
📌 Where to find:
● Company’s 10-K (Annual Report), 10-Q (Quarterly Report)
● Earnings Calls & Investor Presentations
● Equity Research Reports (Bloomberg, S&P Capital IQ, FactSet)
● Industry Growth Forecasts
2. EBIT (Operating Profit) & EBIT Margins
📌 Where to find:
● Income Statement (10-K, 10-Q) → Operating Income (EBIT)
● Historical trends & analyst estimates
● Comparable company margins from databases like CapIQ or Bloomberg
3. Depreciation & Amortization (D&A)
📌 Where to find:
● Cash Flow Statement → "Depreciation & Amortization" line
● Sometimes in the footnotes of 10-K (PPE & Intangibles section)
4. Capital Expenditures (CapEx)
📌 Where to find:
● Cash Flow Statement → "Capital Expenditures" or "Purchases of PP&E"
● Management Guidance or Industry Trends
5. Changes in Net Working Capital (NWC)
📌 Where to find:
● Balance Sheet → (Current Assets - Current Liabilities)
● Calculate YoY changes to estimate future needs
6. Tax Rate
📌 Where to find:
● Income Statement → Effective Tax Rate = (Income Tax Expense / Pre-tax Income)
● Corporate Tax Rates by Region (IRS, OECD data, or analyst reports)
7. Discount Rate (WACC - Weighted Average Cost of Capital)
📌 Where to find:
● Risk-Free Rate: U.S. Treasury Yield (10-year or 30-year bond from the Fed’s website)
● Equity Risk Premium (ERP): From market research reports (Damodaran, Kroll, etc.)
● Beta: Bloomberg, CapIQ, or calculated using regression
● Cost of Debt: From the company's bonds, credit rating (Moody’s, S&P)**
8. Terminal Value Assumptions
📌 Where to find:
● Growth Rate Method: Based on GDP growth (~2-3% for mature markets)
● Exit Multiple Method: Use industry median EV/EBITDA or EV/Revenue multiples from
comparable companies
9. Shares Outstanding & Net Debt
📌 Where to find:
● Shares Outstanding: Balance Sheet or SEC Filings (10-K, 10-Q)
● Net Debt = (Total Debt - Cash & Cash Equivalents) → Balance Sheet
Perennial WEP-DCF-Model
Key Inputs in Blue & Where to Find Them
1. Tax Rate (25%) → Found in the company’s annual report (10-K) or financial
statements under “Effective Tax Rate.”
2. Discount Rate (12%) → Based on Weighted Average Cost of Capital (WACC), which
considers:
○ Cost of equity (from CAPM formula)
○ Cost of debt (from company bonds or credit rating)
○ Capital structure weights (debt/equity mix)
3. Perpetual Growth Rate (3%) → Based on long-term GDP growth or industry estimates.
4. EV/EBITDA Multiple (7.0x) → Sourced from comparable companies (public comps)
or industry reports (Bloomberg, CapIQ).
5. Capex (15,000 per year) → Found in Cash Flow Statement under "Capital
Expenditures."
6. D&A (Depreciation & Amortization ~15,000 per year) → Found in Cash Flow
Statement or footnotes of the annual report.
7. Net Working Capital (NWC) Changes (~375-611 per year) → Found by subtracting
Current Liabilities from Current Assets in the Balance Sheet.
8. EBIT (Operating Profit ~47,814-63,039 per year) → Found in the Income Statement
under Operating Income.
DCF Process in Your Model
● Unlevered Free Cash Flow (FCF) = EBIT - Taxes + D&A - Capex - Changes in NWC
● Transaction CF → Reflects initial investment (-290,450) and future cash flows, leading
to the Exit Value (542,129).
Perennial WEP-DCF-Template
1. Tax Rate (21.0%)
● Definition: The tax rate represents the percentage of a company’s taxable income that
is paid to the government in taxes.
● Source:
○ If the company is based in the U.S., the corporate tax rate is generally
determined by federal and state laws.
○ For example, in the U.S., the federal corporate tax rate is 21%, which matches
the number in the table.
○ Additional state or local taxes may apply, but this model might be using just the
federal rate.
○ Companies operating in different countries will have different corporate tax rates,
which can be found in government tax codes.
● Where to Find It:
○ The company’s annual report (10-K filing in the U.S.) under the income tax
section.
○ Financial statements or investor presentations.
○ Tax authorities' official websites (e.g., IRS for the U.S., HMRC for the U.K.).
2. Long-Term Growth Rate (3.0%)
● Definition: The long-term growth rate is an estimate of how much the company’s cash
flows or earnings will grow indefinitely into the future.
● Source:
○ This number is typically based on historical growth rates, industry trends, and
macroeconomic factors.
○ It is often close to or slightly above inflation and GDP growth to reflect a
sustainable long-term trajectory.
○ A 3.0% growth rate is a common assumption in financial modeling, as it aligns
with the historical average GDP growth in many developed economies.
○ It can also be adjusted based on the company's competitive position and
expected industry growth.
● Where to Find It:
○ Industry reports from consulting firms (e.g., McKinsey, PwC, Deloitte).
○ Equity research reports from investment banks (e.g., Goldman Sachs,
Morgan Stanley).
○ Historical company financials, showing past revenue and cash flow growth.
○ Management guidance in investor calls and financial statements.
3. Weighted Average Cost of Capital (WACC) - 8.0%
● Definition: WACC represents the company’s average cost of financing, considering
both debt and equity. It is the discount rate used in valuation models like the Discounted
Cash Flow (DCF) model.
● Formula:
WACC=(EV×Re)+(DV×Rd×(1−Tc))WACC = \left( \frac{E}{V} \times Re \right) + \left(
\frac{D}{V} \times Rd \times (1 - Tc) \right)WACC=(VE×Re)+(VD×Rd×(1−Tc))
Where:
○ EEE = Market value of equity (shares outstanding × share price)
○ DDD = Market value of debt
○ VVV = Total firm value (E + D)
○ ReReRe = Cost of equity, calculated using the Capital Asset Pricing Model
(CAPM): Re=Rf+β(Rm−Rf)Re = Rf + \beta (Rm - Rf)Re=Rf+β(Rm−Rf) where:
■ RfRfRf = Risk-free rate (often the yield on government bonds)
■ β\betaβ = Stock beta (volatility relative to the market)
■ RmRmRm = Expected market return
○ RdRdRd = Cost of debt (interest rate on company debt)
○ TcTcTc = Corporate tax rate
● Why 8.0%?
○ WACC values typically range between 6-12% for most companies, depending on
their industry and risk profile.
○ 8.0% suggests a moderate level of risk, potentially for a mid-sized company in
a stable industry.
● Where to Find It?
○ Calculated using market data (debt interest rates, stock performance).
○ Bloomberg Terminal or Reuters (for publicly traded companies).
○ Investment banking and equity research reports.
4. Share Price (3.0)
● Definition: The share price represents the current market price per share of the
company’s stock.
● Source:
○ If the company is publicly traded, the share price can be found on:
■ Stock exchanges (NYSE, NASDAQ, LSE, etc.)
■ Market data websites (Yahoo Finance, Bloomberg, Google Finance)
○ If the company is private, the share price is estimated from:
■ The most recent funding round valuation.
■ Comparable company analysis (valuing based on industry peers).
■ Internal company projections.
● Why is it $3.00?
○ This could be the actual market price for a public company.
○ If the company is private, it could be a valuation assumption based on past
funding rounds.
5. Shares Outstanding (1,000.0)
● Definition: The total number of shares that exist for the company. It is used to calculate
market capitalization.
● Formula: Market Capitalization=Share Price×Shares Outstanding\text{Market
Capitalization} = \text{Share Price} \times \text{Shares Outstanding}Market
Capitalization=Share Price×Shares Outstanding
○ Using given values: 3.0×1,000=3,0003.0 \times 1,000 = 3,0003.0×1,000=3,000
○ This matches the Market Capitalization shown in the table.
● Source:
○ If public: Found in financial reports (10-K, 10-Q filings).
○ If private: Based on company investor presentations or cap table
(capitalization table).
● Where to Find It?
○ Stock exchange filings (for public companies).
○ Investor presentations or startup pitch decks (for private companies).
○ SEC Filings (Edgar database for U.S. companies).
Final Summary
Item Definition Source
Tax Rate (21.0%) Corporate income tax rate Government tax laws, company
filings
Long-Term Growth Expected perpetual growth in Economic reports, industry
Rate (3.0%) cash flows analysis
WACC (8.0%) Weighted average cost of Financial models, Bloomberg,
capital (cost of debt & equity) investment reports
Share Price (3.0) Market price per share Stock exchange, financial reports,
funding round valuation
Shares Outstanding Total number of company Company reports, SEC filings,
(1,000.0) shares investor materials
1. EBIT (Earnings Before Interest and Taxes)
● Definition: EBIT represents the company’s profitability before considering interest and
taxes. It reflects the core operating earnings.
● Formula: EBIT=Revenue−Operating Expenses(OPEX)\text{EBIT} = \text{Revenue} -
\text{Operating Expenses} (OPEX)EBIT=Revenue−Operating Expenses(OPEX) Or
equivalently: EBIT=Net Income+Interest Expense+Taxes\text{EBIT} = \text{Net Income}
+ \text{Interest Expense} + \text{Taxes}EBIT=Net Income+Interest Expense+Taxes
● Why It’s Important:
○ It shows operating profitability without the effect of financial structure (debt vs.
equity financing).
○ Used to calculate EBITDA and interest coverage ratios.
● Where to Find It:
○ Income statement (usually listed as "Operating Profit").
○ SEC Filings (10-K, 10-Q).
○ Investor presentations.
2. Depreciation & Amortization (D&A)
● Definition:
○ Depreciation represents the loss in value of physical assets (e.g., buildings,
machinery, equipment) over time.
○ Amortization represents the loss in value of intangible assets (e.g., patents,
software, goodwill) over time.
● Formula:
○ Straight-line Depreciation (simplified method): Annual Depreciation=Initial
Asset Value−Salvage ValueUseful Life (Years)\text{Annual Depreciation} =
\frac{\text{Initial Asset Value} - \text{Salvage Value}}{\text{Useful Life
(Years)}}Annual Depreciation=Useful Life (Years)Initial Asset Value−Salvage
Value
● Why It’s Important:
○ A non-cash expense that impacts EBITDA and Free Cash Flow (FCF).
○ Helps analyze capital-intensive businesses (e.g., manufacturing, telecom).
● Where to Find It:
○ Cash flow statement (under Operating Activities).
○ Notes to financial statements in SEC filings.
○ Investor reports.
3. Capital Expenditure (CapEx)
● Definition: CapEx represents money spent on acquiring, upgrading, or maintaining
long-term assets like property, equipment, and technology.
● Formula: \text{CapEx} = \text{Change in PPE (Property, Plant & Equipment)} +
\text{Depreciation}
● Why It’s Important:
○ Indicates investment in future growth.
○ High CapEx means expansion, while low CapEx could indicate cash
conservation or maturity.
● Where to Find It?
○ Cash flow statement (under Investing Activities).
○ Company investor presentations.
4. Change in Working Capital (ΔWC)
● Definition: Working Capital (WC) is the difference between a company’s current assets
and current liabilities.
○ The change in working capital shows whether a company is using or
generating cash in its day-to-day operations.
● Formula: ΔWC=(Current Assets−Current Liabilities)Current Year−(Current
Assets−Current Liabilities)Previous Year\Delta WC = (\text{Current Assets} -
\text{Current Liabilities})_{\text{Current Year}} - (\text{Current Assets} - \text{Current
Liabilities})_{\text{Previous Year}}ΔWC=(Current Assets−Current Liabilities)Current
Year−(Current Assets−Current Liabilities)Previous Year
● Why It’s Important:
○ Positive ΔWC → More cash is tied up in operations (could indicate growth but
also increased investment in inventory/accounts receivable).
○ Negative ΔWC → More cash is freed up, meaning the company is collecting
receivables faster than paying suppliers.
● Where to Find It?
○ Balance sheet (look at Current Assets & Liabilities).
○ Cash flow statement (under Operating Activities).
5. Cash
● Definition: Represents the amount of money available in the company’s bank accounts
and short-term liquid investments.
● Why It’s Important:
○ Critical for liquidity management.
○ A high cash balance can mean strong financial health, while a low cash
balance might indicate potential liquidity issues.
● Where to Find It?
○ Balance sheet (under Assets section).
○ Cash flow statement (ending cash balance).
6. Debt
● Definition: The total amount of loans and borrowings the company has taken.
○ Can be divided into short-term debt (due within a year) and long-term debt
(due beyond a year).
● Formula: Total Debt=Short-term Debt+Long-term Debt\text{Total Debt} =
\text{Short-term Debt} + \text{Long-term Debt}Total Debt=Short-term Debt+Long-term
Debt
● Why It’s Important:
○ Used in leverage ratios like Debt-to-Equity (D/E) and Debt-to-EBITDA.
○ High debt can mean growth financing, but too much can indicate financial
distress.
● Where to Find It?
○ Balance sheet (under Liabilities section).
○ Notes to financial statements.
Final Summary Table
Metric Definition Formula Where to Find It?
EBIT Operating Profit Net Income + Interest + Income Statement
Taxes
Depreciation & Non-cash expense Sum of depreciation & Cash Flow
Amortization (D&A) related to asset amortization expenses Statement, Notes to
value loss Financials
Capital Expenditure Money spent on Change in PPE + Cash Flow
(CapEx) long-term assets Depreciation Statement
(Investing Activities)
Change in Working Change in (Current Assets - Balance Sheet,
Capital (ΔWC) short-term assets & Current Liabilities) Year Cash Flow
liabilities 2 - Year 1 Statement
Cash Liquid assets Direct value Balance Sheet
available
Debt Money borrowed by Short-Term Debt + Balance Sheet
the company Long-Term Debt