Question

Other than the murkiness of interpreting equity valuation modeling results, the material focused on the key drivers of two models (Free Cash Flow "FCF" and Market Multiples "MM"). Why can't an analyst plug data into the FCF Equity Valuation Model and decide that the resulting value in the "answer" cell is the true, accurate, 'intrinsic' value of the business? Cite examples.

Answer 1

The analyst plug data into the FCF equity valuation model because it show the correct picture of the company and give the intrinsic value of the business with the help of DCF( discounted cash flow) valuation model , DCF gives the PV of the future free cash flow and for this we have to find the valuation of the company with the below formula :

NOPAT = EBIT*(1-tax)

+D&A

+-change in working capital

- CAPEX

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FCF

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- Discounted return expectation

_______________

DCF

________________

According to two models (Free Cash Flow "FCF" and Market Multiples "MM") ,FCF we can find with the help of DCF valuation model and it gives true accurate intrinsic value of the business & MM market multiples we can find with the help of company comparable analysis and precedent transaction analysis method and it gives the relative value and approach of the business,

So that's why analyst choose the FCF or DCF valuation model because DCF help to find the terminal value of the business with the help of exit value method and perpetuity growth method.