mod 10 - dcf - forecast drivers
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Mod 10 - DCF - Forecast DriversTRANSCRIPT
7/7/15
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Michael R. Roberts William H. Lawrence Professor of Finance The Wharton School, University of Pennsylvania
Discounted Cash Flow: Forecast Drivers
Copyright © Michael R. Roberts
Copyright © Michael R. Roberts
Last TimeDiscounted Cash Flow (DCF)• Free Cash Flow
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Copyright © Michael R. Roberts
This TimeDiscounted Cash Flow (DCF)• Forecast Drivers
Forecast Drivers
Copyright © Michael R. Roberts
7/7/15
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FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
Copyright © Michael R. Roberts
Revenue = Market Size x Market Share x Price
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
Copyright © Michael R. Roberts
7/7/15
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Revenue = Market Size x Market Share x Price
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
Copyright © Michael R. Roberts
Revenue = Market Size x Market Share x Price
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
Copyright © Michael R. Roberts
7/7/15
5
Revenue = Market Size x Market Share x Price
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
Copyright © Michael R. Roberts
Corp
Revenue = Market Size x Market Share x Price
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
Copyright © Michael R. Roberts
Corp
7/7/15
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Costs = Cost Margin x Revenue
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
Copyright © Michael R. Roberts
Costs = R&D Expenditures
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
Copyright © Michael R. Roberts
7/7/15
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Capital Expenditures
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
Copyright © Michael R. Roberts
Capital Expenditures
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
Copyright © Michael R. Roberts
7/7/15
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Depreciation
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
*Straight line depreciation
Copyright © Michael R. Roberts
Net Working Capital = Cash + Inventory + AR – AP
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
Copyright © Michael R. Roberts
7/7/15
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Net Working Capital = Cash + Inventory + AR – AP
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
Copyright © Michael R. Roberts
Net Working Capital = Cash + Inventory + AR – AP
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
Copyright © Michael R. Roberts
7/7/15
10
Net Working Capital = Cash + Inventory + AR – AP
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
Copyright © Michael R. Roberts
Net Working Capital = Cash + Inventory + AR – AP
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
Copyright © Michael R. Roberts
7/7/15
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Δ Net Working Capital = Net Working Capital (t) – Net Working Capital (t-1)
where Δ = change over one period
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
Copyright © Michael R. Roberts
Taxes
FCF = (Revenue – Costs – Depreciation) x (1 – tC) + Depreciation – Capital Expenditures – Change in Net Working Capital
We want the marginal tax rate (MTR)=
Tax rate on additional $ of earnings25.5%
Copyright © Michael R. Roberts
7/7/15
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This is Nonsense!
Copyright © Michael R. Roberts
This is Nonsense!Impossible to make accurate forecasts!
Copyright © Michael R. Roberts
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This is Nonsense!Impossible to make accurate forecasts!
I agree, but that’s not the point!!!!
Copyright © Michael R. Roberts
Lesson: Point of DCF is to focus discussion and analysis on relevant issues
Copyright © Michael R. Roberts
7/7/15
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Lesson: Successful valuation (i.e., decision making) depends critically on input from non-finance personnel
Copyright © Michael R. Roberts
Summary
Copyright © Michael R. Roberts
7/7/15
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Lessons
• Forecast Drivers are the assumptions used to populate our free cash flow forecasts
• Goal is to establish framework for discussion– Think about value drivers
Copyright © Michael R. Roberts
Coming up next
• Discounted Cash Flow (DCF)– Forecasting free cash flow
Copyright © Michael R. Roberts