Assignment #4: Discounted Cash Flow
Submit this assignment electronically to the instructor by the due date
DCF
Using the Excel Income Statement you created in the previous assignment. Add a new
spreadsheet labeled DCF. Copy the DCF template from the examples sent to you.
 Project 10 years of free cash flow and calculate a DCF target price.
Important inputs to think about…
 Are your margin projections increasing/decreasing/constant? Why?
 What has your sales growth rate been? What is your sales growth rate going forward? Is
the growth rate increasing or decreasing? Why?
 Is investment in capital expenditures increasing or decreasing?
 Is depreciation & amortization increasing or decreasing?
 Does the change to Working Capital make sense? This is likely a negative number.
 What terminal growth rate are you using? Why?
 What discount rate are you using? Why?
 What is your tax rate?
 What is your target price?
 What assumptions are the key drivers of the stock’s target price (sales, margins, capex,
etc)?
Hint: You may want to try several discount rate and growth rates since the DCF is very sensitive
to small changes in terminal growth and discount rates. Try a sensitivity analysis matrix.
Note: For companies in the Financial Sector, assume Net Income is equal to Free Cash Flow.
Assignment #4
4/10/14
1
Common Mistakes when working on this assignment:
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Select appropriate discount rate.
o We assume 10% is the discount rate of the market. If your company is more
cyclical (i.e. less certain cash flows), use a higher rate. If your company is more
stable than the market, use a lower discount rate.
Select the appropriate terminal growth rate (this pertains to cash flow, not revenues).
o We assume that 4% is the terminal growth rate of the market. If you believe your
company will grow at a faster rate than the market, use a slightly higher rate. If
you believe your company will grow slower than the market, use lower terminal
growth rate.
The sales growth rate should slow over time. By the terminal year, sales growth should
fade to your terminal growth rate.
Look for sudden changes in Free Cash Flow Growth…this may mean you have a
calculation problem.
Make sure Depreciation/Amortization and Capex converge (i.e. offset) by the terminal
year.
Be sure to input correct shares outstanding, current price, Ticker, total debt and total cash.
For cyclical companies, make sure that your margin assumptions in the terminal year are
MID-CYCLE margins (i.e. average).
You may need to add/delete lines from the template.
Assignment #4
4/10/14
2