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When you are valuing a firm, for example a target firm, using DCF valuation, you would follow these general steps (can look in our M&A
When you are valuing a firm, for example a target firm, using DCF valuation, you would follow these general steps (can look in our M&A class slides for help): 1. First, you would create a capital budgeting pro-forma Income Statement for the firm to identify the free cash flows (FCF) for it as if it was unlevered. You will forecast FCF until reasonable and after that you would calculate the Terminal Value. 2. Next, you would estimate the proper discount rate for this firm by calculating its WACC. - 3. Then, you would discount all the FCF using WACC to the present and sum them up to find value of the firm (V). 4. Since you are generally interested in the equity value of the firm and V=D+E (value of firm = debt + equity), you would need to find E. Given you found V using steps above, you would subtract D from it to find E. For valuation we generally use D = long-term debt + short-term debt outside of AP - cash and marketable securities
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