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Amazon Valuation Model (AMZN)
Amazon Valuation Model (AMZN)What is the Valuation of Amazon? Amazon (NASDAQ: AMZN) is an e-commerce company that offers online retail shopping and advertising services to consumers, as well as serving enterprises through Amazon...
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Beta (β)
Beta (β)What is Beta in Finance? Beta (β) measures the sensitivity of a security or portfolio of securities to systematic risk (i.e. volatility) relative to the broader securities market. Levered and Unlevere...
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Capital Asset Pricing Model (CAPM)
Capital Asset Pricing Model (CAPM)What is CAPM? The Capital Asset Pricing Model (CAPM) estimates the expected return on an investment given its systematic risk. The cost of equity – i.e. the required rate of return for equity holders...
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Cash Flow Drivers
Cash Flow DriversWhat are Cash Flow Drivers? Cash Flow Drivers determine the sustainability and future growth trajectory of a company, as they are byproducts of long-term net operating changes. Forecasting a company...
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Common DCF Model Mistakes
Common DCF Model MistakesWhat are the Common DCF Mistakes? The DCF model relies significantly on forward-looking projections and discretionary assumptions, making it prone to bias and mistakes. In the following post, we’ve co...
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Comparable Company Analysis
Comparable Company AnalysisWhat is Comparable Company Analysis? Comparable Company Analysis is a relative valuation method in which a company’s value is derived from comparisons to the current stock prices of similar comp...
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Cost of Debt (kd)
Cost of Debt (kd)What is Cost of Debt? The Cost of Debt is the minimum rate of return that debt holders require to take on the burden of providing debt financing to a certain borrower. Compared to the cost of equity,...
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Cost of Equity (ke)
Cost of Equity (ke)What is Cost of Equity? The Cost of Equity represents the minimum threshold for the required rate of return for equity investors, which is a function of the risk profile of the company. If an investor...
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Cost of Preferred Stock (kp)
Cost of Preferred Stock (kp)What is Cost of Preferred Stock? The Cost of Preferred Stock represents the rate of return required by preferred shareholders and is calculated as the annual preferred dividend paid out (DPS) divided...
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DCF Model Training
DCF Model TrainingWhat is a DCF Model? The Discounted Cash Flow Model, or “DCF Model”, is a type of financial model that values a company by forecasting its cash flows and discounting them to arrive at a cu...
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Discount Factor
Discount FactorWhat is Discount Factor? The Discount Factor is used to calculate what the value of receiving $1 at some point in the future would be (the present value, or “PV”) based on the implied date...
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Discount Rate
Discount RateWhat is Discount Rate? The Discount Rate represents the minimum return expected to be earned on an investment given its specific risk profile. In practice, the present value (PV) of the future cash fl...
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Dividend Discount Model (DDM)
Dividend Discount Model (DDM)What is Dividend Discount Model (DDM)? The Dividend Discount Model (DDM) states that the intrinsic value of a company is a function of the sum of all the expected dividends, with each payment discount...
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EBIAT
EBIATWhat is EBIAT? EBIAT is a company’s after-tax operating income assuming there is no debt in its capital structure, i.e. the effects of interest are removed.
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Enterprise Value (EV)
Enterprise Value (EV)What is Enterprise Value? Enterprise Value (TEV) represents the value of a company’s operations to all stakeholders, such as common equity shareholders, preferred stockholders, and lenders of de...
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Enterprise Value vs. Equity Value
Enterprise Value vs. Equity ValueWhat is Enterprise Value vs. Equity Value? Enterprise Value vs. Equity Value is an often-misunderstood topic, even by newly hired investment bankers. Understanding the distinction ensures that the fre...
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Equity Risk Premium (ERP)
Equity Risk Premium (ERP)What is the Equity Risk Premium? The Equity Risk Premium (ERP) represents the excess returns over the risk-free rate that investors expect for taking on the incremental risks connected to the equities...
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Equity Value to Enterprise Value Bridge
Equity Value to Enterprise Value BridgeWhat is the Equity Value to Enterprise Value Bridge? The Equity Value to Enterprise Value Bridge illustrates the relationship between a company’s equity value and enterprise value (TEV). Specifically,...
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EV/EBIT Multiple
EV/EBIT MultipleWhat is EV/EBIT? The EV/EBIT Multiple is the ratio between enterprise value (EV) and earnings before interest and taxes (EBIT). Considered one of the most frequently used multiples for comparisons amo...
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EV/EBITDA Multiple
EV/EBITDA MultipleWhat is EV/EBITDA? The EV/EBITDA Multiple compares the total value of a company’s operations (EV) relative to its earnings before interest, taxes, depreciation, and amortization (EBITDA). In practice,...
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EV/FCF Multiple
EV/FCF MultipleWhat is EV/FCF? The EV/FCF valuation multiple is a ratio comparing a company’s enterprise value (EV) to its free cash flow to firm (FCFF).
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EV/Invested Capital Multiple
EV/Invested Capital MultipleWhat is EV/Invested Capital? EV/Invested Capital is a valuation multiple that compares the enterprise value of a company in relation to its invested capital, i.e. the sum of fixed assets and net worki...
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EV/Revenue Multiple
EV/Revenue MultipleWhat is EV/Revenue Multiple? The EV/Revenue Multiple is a ratio that compares the total valuation of a firm’s operations (enterprise value) to the amount of sales generated in a specified period...
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Fairness Opinion
Fairness OpinionWhat is Fairness Opinion? In the M&A context, a fairness opinion is a document provided by the seller’s investment banker to the seller’s board of directors attesting to the fairness of a transact...
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Forward P/E Ratio
Forward P/E RatioWhat is the Forward P/E Ratio? The Forward P/E Ratio is a variation of the price-to-earnings ratio in which a company’s forecasted earnings per share (EPS) is used rather than its historical EPS.
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Free Cash Flow Conversion
Free Cash Flow ConversionWhat is Free Cash Flow Conversion? Free Cash Flow Conversion is a liquidity ratio that measures a company’s ability to convert its operating profits into free cash flow (FCF) in a given period. By com...
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Free Cash Flow to Equity (FCFE)
Free Cash Flow to Equity (FCFE)What is FCFE? FCFE, or “free cash flow to equity”, measures the amount of cash remaining for equity holders once operating expenses, re-investments, and financing-related outflows have bee...
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Free Cash Flow to Firm (FCFF)
Free Cash Flow to Firm (FCFF)What is FCFF? FCFF stands for “free cash flow to firm” and represents the cash generated by the core operations of a company that belongs to all capital providers (both debt and equity). O...
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Free Cash Flow Yield (FCF)
Free Cash Flow Yield (FCF)What is Free Cash Flow Yield? The Free Cash Flow Yield (%) measures the amount of cash generated from the core operations of a company relative to its valuation.
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Gordon Growth Model (GGM)
Gordon Growth Model (GGM)What is the Gordon Growth Model? The Gordon Growth Model calculates a company’s intrinsic value under the assumption that its shares are worth the sum of all its future dividends discounted back...
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Gross Merchandise Value (GMV)
Gross Merchandise Value (GMV)What is GMV? GMV, short for “gross merchandise value”, is the sum of all merchandise sold across a given period – most often tracked by e-commerce companies and customer-to-customer (C2C)...
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Industry Beta
Industry BetaWhat is the Industry Beta Approach? The Industry Beta is an alternative approach to estimating a company’s beta, in which a peer-group derived beta is applied to the target being valued.
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Intrinsic Value
Intrinsic ValueWhat is Intrinsic Value? Intrinsic Value is the estimated worth of an asset following the objective analysis of its fundamentals and internal data – without reliance on external factors such as prevai...
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Justified P/E Ratio
Justified P/E RatioWhat is the Justified P/E Ratio? The Justified P/E Ratio is a variation of the price-to-earnings ratio linked to the Gordon Growth Model (GGM) in an effort to better understand a company’s under...
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Levered DCF Model
Levered DCF ModelWhat is a Levered DCF Model? The Levered DCF Model values a company by discounting the forecasted cash flows that belong only to equity holders, excluding all cash flows to non-equity claims such as d...
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Levered Free Cash Flow (LFCF)
Levered Free Cash Flow (LFCF)What is Levered Free Cash Flow? Levered Free Cash Flow (LFCF) is the residual cash belonging to only equity holders after deducting operating costs, reinvestments (e.g. working capital and capital exp...
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LTM vs. NTM Multiples
LTM vs. NTM MultiplesWhat is LTM vs. NTM Multiples? Last Twelve Months (LTM) or Next Twelve Months (NTM) are two standard forms in which valuation multiples are presented in trading and transaction comps analyses. While L...
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Market Capitalization
Market CapitalizationWhat is Market Capitalization? Market Capitalization, or “market cap”, represents the total value of a company’s common shares outstanding to its equity holders. Often used interchangeably...
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Market Value
Market ValueWhat is Market Value? The Market Value of a company’s common equity is a function of the most recent price paid by investors in the open markets to purchase a share and the total number of diluted sha...
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Mid-Year Convention
Mid-Year ConventionWhat is the Mid-Year Convention? The Mid-Year Convention treats forecasted free cash flows (FCFs) as if they were generated at the midpoint of the period. Since the cash inflows and outflows occur con...
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NOPAT
NOPATWhat is NOPAT? Net Operating Profit After Tax (NOPAT) represents a company’s theoretical after-tax operating income if it had no debt in its capital structure. By removing the impact of financin...
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NOPAT Margin
NOPAT MarginWhat is NOPAT Margin? The NOPAT Margin is a profitability ratio that compares a company’s net operating profit after tax to revenue, expressed in percentage form.
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NOPLAT
NOPLATWhat is NOPLAT? NOPLAT stands for “net operating profit less adjusted taxes” and represents a company’s operating income upon adjusting for taxes.
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NVIDIA Valuation Model (NVDA)
NVIDIA Valuation Model (NVDA)What is the Valuation of NVIDIA? In the following post, we’ll build a DCF valuation model for NVIDIA (NASDAQ: NVDA) to determine its intrinsic value and implied share price. NVIDIA, a pioneer in graph...
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P/E Ratio
P/E RatioWhat is P/E Ratio? The P/E Ratio, or “price-to-earnings ratio”, is a common valuation metric used to measure a company’s equity value in relation to its net earnings. Simply put, the...
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PEG Ratio
PEG RatioWhat is PEG Ratio? The PEG Ratio, shorthand for “price/earnings-to-growth,” is a valuation metric that standardizes the P/E ratio against a company’s expected growth rate. Unlike the tradi...
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Precedent Transaction Analysis
Precedent Transaction AnalysisWhat is Precedent Transaction Analysis? Precedent Transaction Analysis estimates the implied value of a company by analyzing the recent acquisition prices paid in comparable transactions.
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Price to Book Ratio (P/B)
Price to Book Ratio (P/B)What is Price to Book Ratio? The Price to Book (P/B Ratio) measures the market capitalization of a company relative to its book value of equity. Widely used among the value investing crowd, the P/B ra...
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Price to Cash Flow (P/CF)
Price to Cash Flow (P/CF)What is Price to Cash Flow? The Price to Cash Flow Ratio (P/CF) evaluates the valuation of a company’s stock by comparing its share price to the amount of operating cash flow produced. Unlike th...
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Price to Sales Ratio
Price to Sales RatioWhat is Price to Sales? The Price to Sales Ratio measures the value of a company in relation to the total amount of annual sales it has recently generated.
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Price to Tangible Book Value (P/TBV)
Price to Tangible Book Value (P/TBV)What is Price to Tangible Book Value? The Price to Tangible Book Value (P/TBV) ratio measures a company’s market capitalization relative to its book value of equity, net of intangible assets.
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Pros and Cons of DCF Analysis
Pros and Cons of DCF AnalysisWhat are the Pros and Cons of the DCF Analysis? The DCF analysis estimates a company’s intrinsic value using explicit assumptions for the company’s future free cash flows (FCFs), discount...
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Reinvestment Rate
Reinvestment RateWhat is Reinvestment Rate? The Reinvestment Rate measures the percentage of a company’s after-tax operating income (i.e. NOPAT) that is allocated to capital expenditures (Capex) and net working capita...
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Relative Value
Relative ValueWhat is Relative Value? Relative Value determines the approximate worth of an asset by comparing it to assets with similar risk/return profiles and fundamental traits.
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Revenue Multiple
Revenue MultipleWhat is Revenue Multiple? A Revenue Multiple measures the valuation of an asset, such as a company, relative to the amount of revenue it generates. While revenue-based multiples are seldom used in pra...
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Reverse DCF Model
Reverse DCF ModelWhat is a Reverse DCF Model? The Reverse DCF Model attempts to reverse-engineer the current share price of a company to determine the assumptions implied by the market.
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Risk Free Rate (rf)
Risk Free Rate (rf)What is the Risk Free Rate? The Risk Free Rate (rf) is the theoretical rate of return received on zero-risk assets, which serves as the minimum return required on riskier investments. The rate should...
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Should We Really Trust a DCF Model?
Should We Really Trust a DCF Model?How Accurate are DCF Models? The DCF model is used by investment bankers to present a framework to their clients that guides their decision-making process, rather than to precisely determine if a comp...
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Sum of the Parts (SOTP)
Sum of the Parts (SOTP)What is SOTP? The Sum of the Parts Analysis (SOTP), or “break-up analysis”, estimates the value of each business segment within a company separately, which are then added together to arriv...
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Systematic Risk
Systematic RiskWhat is Systematic Risk? Systematic Risk is defined as the risk inherent to the entire market, rather than impacting only one specific company or industry.
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Terminal Value
Terminal ValueWhat is Terminal Value? The Terminal Value represents the estimated value of a company beyond the final year of the explicit forecast period, i.e. the Stage 1 cash flows. Usually, the terminal value c...
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Trailing P/E Ratio
Trailing P/E RatioWhat is Trailing P/E Ratio? The Trailing P/E Ratio is calculated by dividing a company’s current share price by its most recent reported earnings per share (EPS), i.e. the latest fiscal year EPS or th...
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Treasury Stock Method (TSM)
Treasury Stock Method (TSM)What is Treasury Stock Method? The Treasury Stock Method (TSM) is used to compute the net new number of shares from potentially dilutive securities (i.e. stocks). The main idea behind the treasury sto...
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Types of Financial Models
Types of Financial ModelsWhat are the Different Types of Financial Models? So, “What are the Different Types of Financial Models?”. The types of financial models constructed on the job are directly related to the...
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UBS Valuation Multiples Report
UBS Valuation Multiples ReportUBS Valuation Multiples Primer The following UBS report, published over a decade ago, breaks down the fundamentals underlying valuation multiples. If you are preparing for interviews and want to be pr...
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Unlevered Free Cash Flow (UFCF)
Unlevered Free Cash Flow (UFCF)What is Unlevered Free Cash Flow? Unlevered Free Cash Flow is the cash generated by a company before accounting for interest and taxes, i.e. it represents cash available to all capital providers. Unle...
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Valuation Interview Questions
Valuation Interview QuestionsTop Valuation Interview Questions In the following Valuation Interview Questions guide, we’ll cover the most fundamental technical interview questions related to the core intrinsic value and DCF model...
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Valuation Multiple
Valuation MultipleWhat is a Valuation Multiple? A Valuation Multiple is a ratio that reflects the valuation of a company in relation to a specific financial metric. Usage of a valuation multiple – a standardized financ...
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WACC
WACCWhat is WACC? The Weighted Average Cost of Capital (WACC) is one of the key inputs in discounted cash flow (DCF) analysis and is frequently the topic of technical investment banking interviews. The WA...
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WACC for Private Company
WACC for Private CompanyWhat is WACC for a Private Company? The WACC for a Private Company is calculated by multiplying the cost of each source of funding – either equity or debt – by its respective weight (%) in the capital...
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Walk Me Through a DCF
Walk Me Through a DCFWalk Me Through a DCF? If you’re recruiting for investment banking or related front-office finance positions, “Walk Me Through a DCF” is almost guaranteed to be asked in an interview setti...
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What is a Multiple?
What is a Multiple?[caption id="attachment_6258" align="alignright" width="150"] You gonna have that sandwich?[/caption] What is a Multiple? Investment Bankers talk a lot about valuation multiples. In fact, almost every...