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The only video you need to watch on
DCF
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Valuation Modeling
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Piyush Kumar
WHY DCF
VALUATION
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Before diving into the mechanics of DCF modeling, it’s essential to understand the
core principles that underpin this valuation approach.
Simply learning how to do DCF in excel is not enough for you to have a great
understanding of valuation principles!
There are certain principles that we need to address and understand
Valuation by
Global Consilient Research
GCR’s
Valuation Modeling
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First principle: TVM
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"A rupee today is worth more than a rupee tomorrow"
This is the foundation of DCF analysis. Money loses value over time due to
inflation, risk, and opportunity cost.
Why It Matters in DCF:
Future cash flows need to be discounted to their present value (PV) to
account for the fact that receiving money today is preferable to
receiving it later.
A higher discount rate means a lower present value of future cash flows,
reflecting higher risk or opportunity cost.
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GCR’s
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reverse of
compounding
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At its core, Discounted Cash Flow (DCF) is just compounding in reverse.
1. Understanding Compounding
When we invest money today, it grows over time due to compounding
interest.
Formula for Future Value (FV) using compounding: FV=PV×(1+r)^n
Valuation by
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GCR’s
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Now, the DCF simply works in reverse (Discounting)
Instead of growing money forward, DCF brings future money back to
today’s value.
Formula for Present Value (PV) using discounting (Reverse Compounding):
PV= FV​/(1+r)^n
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Principle 2: Cash & not profits
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“Cash is king" A company’s value is determined by the actual cash flows it
generates, not accounting profits.
Why It Matters in DCF:
Profit figures (Net Income) can be manipulated by accounting policies,
depreciation, and non-cash expenses.
Free Cash Flow (FCF) reflects the real money available for investors and is
used in DCF.
FCF accounts for capital expenditures (CapEx), working capital changes,
and operating expenses—all crucial in determining business sustainability.
Valuation by
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GCR’s
Valuation Modeling
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Principle 3: Risk and
the Discount Rate
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“Higher risk means a lower present value”
Why It Matters in DCF:
Investors demand a return that compensates them for risk.
The discount rate (WACC or required rate of return) reflects the risk level of
future cash flows.
A higher risk company (like a startup) will have a higher discount rate, making
future cash flows less valuable today.
Valuation by
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GCR’s
Valuation Modeling
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Piyush Kumar
Principle 4: terminal value
"Most of a company’s value comes from future cash flows beyond the
forecast period"
Why It Matters in DCF:
Businesses exist indefinitely, and DCF captures value beyond just the next
5–10 years.
The Terminal Value (TV) estimates the company’s worth after the
projection period using a stable growth assumption.
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terminal value
The Terminal Value (TV) represents the value of a business beyond the
explicit forecast period (usually beyond 5–10 years).
Since businesses don’t just stop after the forecast period, we need to
estimate their long-term worth using Terminal Value.
1. Gordon Growth Model (Perpetuity Growth Model)
2. Exit Multiple Method
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Criteria
Gordon Growth Model (Perpetuity Growth)
Exit Multiple Method
Formula
Formula: FCFF*(1+g)/(WACC - g)
TV=Multiple×Metric(EBITDA,EBIT,Revenue)
Concept
Assumes company grows at a constant rate forever.
Assumes company is valued at a multiple of financial metric
(EBITDA, EBIT, Revenue) based on industry norms.
Key Assumptions
Growth rate (g) must be lower than WACC.
Exit multiple should be chosen based on comparable
companies.
Best Used For
Stable, mature businesses with predictable growth.
Companies in industries where M&A transactions or market
comps are available.
Industries Suitable
Utilities, FMCG, consumer staples (low volatility industries).
Tech, startups, private equity, industries with frequent M&A.
Data Requirement
Requires estimating a reasonable long-term growth rate (g).
Requires identifying relevant industry exit multiples from
comparable companies.
Pros
- Simple & easy to apply.
- Works well for mature companies with steady cash flows.
- Theoretically sound if assumptions are correct.
- Based on actual market data (real transactions).
- More practical for industries where companies are
acquired or sold at multiples.
Cons
Highly sensitive to the choice of growth rate (g).
- Overestimation or underestimation of WACC - g can cause
large variations in valuation.
- Exit multiples can vary over time, leading to inconsistent
valuations.
- Can be influenced by market cycles and external factors
(e.g., economic conditions).
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WHAT PROFESSOR RECOMENDS
Professor Aswath Damodaran, a leading expert in valuation, strongly
discourages the use of the Exit Multiple Method (EMM) for calculating
Terminal Value (TV) in Discounted Cash Flow (DCF) models.
His reasoning is based on first principles of valuation and the risk of
introducing external biases.
He Recommends Gordon Growth Model only
Valuation by
Global Consilient Research
GCR’s
Valuation Modeling
Hosted By:
Piyush Kumar
GLOBAL
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BEFORE YOU
LEAVE
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If you have no idea about basic finance or Valuation Modeling, then I highly recommend you
to watch my Comprehensive Course on Valuation Modeling. It will build a solid
foundation for doing valuation & Modelling!
A must watch