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Practitioner's Complete Guide to M&As: An All-Inclusive Reference, with Website by David T. Emott

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Topic 39

Discounted Cash Flow Valuation Illustrated

This topic provides an overview of performing a discounted cash flow (DCF) valuation utilizing the principles and methodologies presented in the previous topics. It then explores the steps after the valuation to determine the buyer's offer.

The reader is encouraged to take the time to read the text in conjunction with the referenced Appendices to gain the appropriate level of understanding of the subject matter discussed in the narrative. Appendices are either presented at the end of this Topic or are available for review and download on the companion Web site noted at the end of this Topic.

DCF VALUATION PROCESS

The key components of the DCF value determination process based on the use of a levered C* discount rate are described and numbered below and in Appendix 39.1. The reader is encouraged to follow the text along with the flow on Appendix 39.1 and the other Appendices referenced.

1. Identify expected risk-adjusted as-is unlevered free cash flow (FCF) for the target resulting from deal value drivers and earnings before interest, tax, depreciation, and amortization (EBITDA) or net operating profit after tax (NOPAT) during the T period.

See also Appendix 44.2(h)–(j) for the deal value drivers (profit and loss, capital employed, and cash flow statements) and FCF components.

2. Construct levered cost of equity, CL, for this business (see Appendix 39.2).

3. Determine the target debt to capital ratio, interest rate on debt employed ...

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