Glossary
DCF Valuation
Every term in the track, defined in plain English. These definitions also pop up when you hover the dotted terms inside lessons - and feed your flashcard review.
Value
- Enterprise ValueEV
- The value of a company's core operating assets, attributable to all providers of capital (equity, debt, preferred, minority holders). Excludes non-core items like excess cash.
- Equity ValueMarket Cap
- The value of a company's common shares - what belongs to equity investors after debt and other obligations. Equals price per share times fully diluted shares.
- Intrinsic Value
- A company's value derived from its own fundamentals (its future cash flows), rather than from what comparable companies trade for. A DCF estimates intrinsic value.
- Relative ValuationComps
- Valuing a company by comparison to peers - multiples of revenue, EBITDA, or earnings. Reflects current market sentiment rather than fundamentals.
- Net Debt
- Total debt minus cash and equivalents. Subtracted from enterprise value to bridge to equity value, since cash could repay debt immediately.
- Non-Controlling InterestNCI
- The portion of a consolidated subsidiary not owned by the parent (a.k.a. minority interest). Added in the bridge from equity value to enterprise value.
Cash flow
- Free Cash FlowFCF
- Cash a company generates after funding operating costs and investment needs - the cash actually available to investors.
- Unlevered Free Cash FlowUFCF
- Cash from core operations available to all investors, before any debt service. Computed as EBIT×(1-tax) + D&A - CapEx - ΔNWC. Discounted at WACC to give enterprise value.
- Levered Free Cash FlowLFCF
- Cash available to equity holders after interest and debt repayment. Discounted at the cost of equity to give equity value.
- EBITOperating income
- Earnings Before Interest and Taxes. Operating profit independent of capital structure and taxes; the starting point of the UFCF build.
- EBITDA
- Earnings Before Interest, Taxes, Depreciation and Amortization. A proxy for operating cash flow and the basis of the most common valuation multiple.
- Depreciation & AmortizationD&A
- A non-cash expense reflecting the aging of assets. Subtracted to reach EBIT, then added back in the cash flow build because no cash leaves the business.
- Capital ExpendituresCapEx
- Cash spent to buy, expand, or maintain physical assets (PP&E). A real cash outflow subtracted in the UFCF build.
- Net Working CapitalNWC
- Non-cash current assets minus non-interest-bearing current liabilities - the cash tied up running day-to-day operations. Its year-over-year change hits free cash flow.
- Days Sales OutstandingDSO
- A/R ÷ Sales × 365 - the average number of days to collect cash from customers. Lower is faster.
- Days Inventory HeldDIH
- Inventory ÷ COGS × 365 - the average number of days to sell inventory. Lower means a leaner operation.
- Days Payable OutstandingDPO
- A/P ÷ COGS × 365 - the average number of days the company takes to pay suppliers. Higher reflects more favorable terms.
- Marginal Tax RateMTR
- The tax rate applied to incremental income; used to tax-affect EBIT in the UFCF build (often the statutory corporate rate, e.g. 21%).
- Operating Leverage
- When revenue grows faster than costs so margins expand with scale - a result of fixed costs spread over more sales.
Discounting
- WACCWeighted Avg. Cost of Capital
- The blended return demanded by all investors, weighted by each one's share of capital. The discount rate for unlevered free cash flow.
- Cost of Equity
- The return equity investors require, typically derived from CAPM. The discount rate for levered free cash flow.
- Cost of Debt
- The effective interest rate a company pays on its debt. Used after-tax in WACC because interest is tax-deductible.
- CAPMCapital Asset Pricing Model
- Estimates the cost of equity as the risk-free rate plus beta times the market risk premium: Re = Rf + β(Rm - Rf).
- Betaβ
- A stock's sensitivity to overall market moves. The market is 1.0; above 1 is more volatile, below 1 less, below 0 counter-cyclical.
- Unlevered BetaAsset Beta
- Beta with the effect of debt stripped out, isolating business risk so companies with different leverage can be compared. Re-levered to a target capital structure.
- Risk-free RateRf
- The return on a riskless asset, usually the 10-year US Treasury yield. The base of CAPM.
- Market Risk Premium
- The excess return investors expect from the market over the risk-free rate (typically 5–8%).
- Discount Rate
- The rate used to shrink future cash flows to present value, reflecting their risk and the time value of money. WACC for unlevered cash flows.
- Discount Factor
- The multiplier 1 / (1 + r)^t that converts a future cash flow in period t to present value.
- Present ValuePV
- The value today of a future cash flow, after discounting at the appropriate rate.
- Net Present ValueNPV
- The sum of the present values of a series of cash flows. The unlevered DCF's NPV is enterprise value.
Terminal value
- Terminal ValueTV
- The value of all cash flows after the explicit forecast period, when the business has reached steady state. Often the majority of a DCF's value.
- Perpetuity Growth Method
- A terminal value method that grows the final-year cash flow at a constant rate forever: TV = FCFt×(1+g) / (WACC - g). The rate should be GDP-like (2–4%).
- Exit Multiple Method
- A terminal value method that applies a market multiple (e.g. EV/EBITDA from comps) to the terminal-year EBITDA.
- Gordon Growth
- The perpetuity formula Value = CF / (r - g) for a cash flow growing at a constant rate forever. The engine behind the perpetuity growth method.
- Steady State
- A normalized run-rate where growth and margins are stable - not a cyclical peak or trough. The final forecast year must represent it, since terminal value extrapolates it.
Statements
- LTMLast Twelve Months
- A rolling measure of the most recent 12 months of performance: most recent full year + recent YTD - prior-year YTD.