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1、P1:ABC/ABCP2:c/dQC:e/fT1:gc03JWBT063-RosenbaumMarch25,20099:25PrinterName:HamiltonCHAPTER3DiscountedCashFlowAnalysisiscountedcashflowanalysis(“DCFanalysis”orthe“DCF”)isafundamentalDvaluationmethodologybroadlyusedbyinvestmentbankers,corporateofficers,universityprofessors,investors,andothe
2、rfinanceprofessionals.Itispremisedontheprinciplethatthevalueofacompany,division,business,orcollectionofassets(“target”)canbederivedfromthepresentvalueofitsprojectedfreecashflow(FCF).Acompany’sprojectedFCFisderivedfromavarietyofassumptionsandjudgmentsaboutitsexpectedfinancialperformance,in
3、cludingsalesgrowthrates,profitmargins,capitalexpenditures,andnetworkingcapital(NWC)requirements.TheDCFhasawiderangeofapplications,includingvaluationforvariousM&Asituations,IPOs,restructurings,andinvestmentdecisions.ThevaluationimpliedforatargetbyaDCFisalsoknownasitsintrinsicvalue,asoppo
4、sedtoitsmarketvalue,whichisthevalueascribedbythemarketatagivenpointintime.Asaresult,whenperformingacomprehensivevaluation,aDCFservesasanimportantalternativetomarket-basedvaluationtechniquessuchascomparablecompaniesandprecedenttransactions,whichcanbedistortedbyanumberoffactors,including
5、marketaberrations(e.g.,thepost-subprimecreditcrunch).Assuch,aDCFplaysanimportantroleasacheckontheprevailingmarketvaluationforapubliclytradedcompany.ADCFisalsovaluablewhentherearelimited(orno)pureplay,peercompaniesorcomparableacquisitions.InaDCF,acompany’sFCFistypicallyprojectedforaperi
6、odoffiveyears.Theprojectionperiod,however,maybelongerdependingonthecompany’ssector,stageofdevelopment,andtheunderlyingpredictabilityofitsfinancialperformance.Giventheinherentdifficultiesinaccuratelyprojectingacompany’sfinancialperformanceoveranextendedperiodoftime(andthroughvariousbusiness
7、andeconomiccycles),aterminalvalueisusedtocapturetheremainingvalueofthetargetbeyondtheprojectionperiod(i.e.,its“goingconcern”value).TheprojectedFCFandterminalvaluearediscountedtothepresentatthetarget’sweightedaveragecostofcapital(WACC),whichisadiscountratecommensuratewithitsbusinessan
