Advanced Discounted Cash Flow (DCF) Analysis

Jul 10, 2024

Review flashcards

Advanced Discounted Cash Flow (DCF) Analysis

Introduction

  • Channel: Rareliquid
  • Presenter's Background: Former JP Morgan Investment Banking Analyst
  • Content Focus: Tech investing, career advice, stocks, and crypto
  • Posting Schedule:
    • Weekdays: Stocks and crypto, tech investing
    • Weekends: Career advice

Agenda

  1. Building multiple scenarios in a DCF
  2. Creating sensitivity tables
  3. Calculating Weighted Average Cost of Capital (WACC)

Discounted Cash Flow (DCF) Refresher

  • For beginners, check an earlier video on DCF basics
  • Today's exercise focuses on an advanced, illustrative DCF model for Tesla

Building Multiple Scenarios

Importance

  • Models need to be flexible due to assumption variability
  • Multiple scenarios mitigate the risk of error from incorrect assumptions

Creating Case Scenarios

  • Conservative Case: Lower growth assumptions, higher tax rates
  • Base Case: Average assumptions
  • Optimistic Case: Higher growth assumptions, lower tax rates

Assumption Variables

  1. Revenue Growth Rates: Vary from optimistic to conservative scenarios
  2. EBIT Margins: Higher in optimistic scenarios, lower in conservative
  3. Tax Rates: Lower in optimistic scenarios, higher in conservative
  4. Depreciation and Amortization (D&A): Typically percentage of CapEx
  5. CapEx Assumptions: Tesla's CapEx can fluctuate, research needed
  6. Change in Net Working Capital: Generally a cash outflow, unique situations like Tesla's deferred revenue

Excel Tips

  • F2 Button: Checks cell references (PC only)
  • OFFSET Function: Used to toggle between cases
  • CHOOSE Function: Allows flexible cell selection across the sheet

Sensitivity Tables

Purpose

  • Visualize how different assumptions affect the final DCF outcome (e.g., share price)

Building Sensitivity Tables

  1. Header Creation
  2. WACC Sensitivity: Example ranges: 12% to 16%
  3. Terminal Growth Rate: Example ranges: 2% to 3%
  4. Data Table Function: Helps visualize multiple scenarios without manual toggling
  5. Use Cases: Helps clients understand and visualize risks/returns in various scenarios

Calculating WACC

Formula

  • Formula: WACC = % of Equity × Cost of Equity + % of Debt × Cost of Debt × (1 - Tax Rate)

Key Components

  1. Risk-Free Rate: Often the 10-year Treasury rate
  2. Beta: Found on financial websites like Yahoo Finance
  3. Equity Market Return: Average annual return for the S&P
  4. Cost of Debt: Average of company's interest rates
  5. Tax Rate: Assumed 21%

Steps to Calculate WACC

  1. Link Equity and Debt Values to the Model
  2. Calculate Percentage of Equity and Debt
  3. Compute Cost of Equity
  4. Cost of Debt Calculation
  5. Final WACC Calculation: Combine percentages and costs with tax adjustment

Conclusion

  • Further Complexity: Quarterly models, detailed revenue builds, etc.
  • Feedback Request: Interested in more detailed tutorials?
  • Model Access: Available on Patreon
  • Monthly Q&A: Build a DCF model from scratch in a Patreon zoom call
  • Giveaways: $10 to first and random commenters, free money from exchange sign-ups

Closing

  • Call to Action: Check Patreon, sign-up for financial platforms
  • Thank You: Appreciation for viewers