My name is Maria Weber.

I'm one of the trainers at Financial Edge and I'm gonna be doing today's session on discounted cashflow Fundamentals.

It's in the name, we are keeping things to their absolute basic right? Of course, DCF is more nuanced, thinness. There's other things we need to think about, checks we can do.

But I'll show you in Felix where you can find access to the more advanced stuff.

And then there's also Felix live coming up next week, I believe, where the focus is on advanced DCF.

Um, so doing fancy things like discounting to a particular date, taking things a step further.

So welcome. If you've just joined, I am gonna just put a link in the chat to where you'll find the spreadsheets I'm gonna be using.

So I've got some slides to help us along to just introduce the concepts.

You'll see there's three spreadsheets there, fundamentals, workouts, empty and full.

I've left those there for you to practice afterwards to do some extra workouts if you want to.

But I always think it's more fun if we can in these sessions to take a real company and try apply the principles to a real company even though we keeping it simple.

Let's see if we can do that for a real company.

So the spreadsheet I'm gonna be using, if you wanna follow along with me, is this Coca-Cola, DCF class.

Please don't be shy to ask questions in the main chat or in the q and a pod.

You do need to have a bit of basic valuation knowledge and a bit of basic accounting knowledge.

But please don't just leave the session if you don't have that.

But do ask questions as we go, right? So let's get started then with talking about just where DCF fits in.

So we are gonna talk through what A DCF is. Okay? Um, someone's just said in the pod there's only an empty coco. Oh, there's no Coca-Cola one.

I think if you have clicked via the um, menu, you've maybe just clicked on a previous, uh, Felix live session.

So I just wanna double check that link that I've put in the chat.

Just double check that if I've linked to the correct one, which I have.

So just make sure if you are going topics and then you're going down to Felix live, just make sure you scroll down far enough.

Okay? So if you scroll down far enough, you will find not that Felix live.

You will find if you keep going, this one coming soon.

DCF fundamentals, Felix live.

Okay, unfortunately, someone's asking about a Wall Street prep login working for Felix.

Unfortunately not. It's two separate platforms.

Um, so I would say let's just follow along as best you can.

If you've got that link in the chat, if that link is not working for you, um, listen along, follow along, and then if you have any questions, you can get in touch with us.

Um, I think when you end the call, there's like a feedback form you can get in touch via that.

Okay. Sorry guys. I know it's maybe a bit frustrating to not, um, have access, but let's see follow along. Hopefully you can still get something out of it.

Okay, let's get going with just introducing what DCF is, where it fits in.

So what is A DCF? Then we're gonna spend some time talking about how to forecast the free cash flows because that is often where a lot of the work has to happen.

Then talking about the terminal value, then discounting it back and getting a present value for the business.

So introductory information, discounted cash flow fits in as part of valuation.

If we look at the bottom of the slide first, we've got two approaches to valuation.

One is to do an absolute valuation.

That's what we are doing today. We are doing a discounted cash flow.

We are looking at this company in and of itself, this company's future cash flows.

What are they worth today? The alternative is to do a relative valuation.

Relative valuation is where we look at comps, where we are looking at multiples.

So we are looking at where similar businesses are trading in the market.

How is the market valuing other similar companies? And so what does that imply about how my company that I'm looking at should be valued? Now in reality with valuation, because there's so many uncertainties and it's so subjectives, you'll do multiple approaches and then you triangulate and just see do they talk to each other? Does it make sense? And then you get some comfort with the valuation you've arrived at.

So what we focusing on today is on the left hand block, absolute valuation.

DCF. We also need to make sure we understand the difference between equity value and enterprise value.

Now, last week's Felix live session, if you missed that, that's what I went through.

I went through the difference between equity value and enterprise value.

And then we also talked about some basic multiples.

The relative valuation approach.

So equity value, we are looking at the value of the shares, what belongs to the shareholders, to the owners of the business.

And then we've got enterprise value, which is the value of the business, the value of the operations.

And that belongs to everybody. That's put funding into the business.

So that belongs to the debt and equity providers.

Okay, let's now have a look at with DCF.

Okay, it's called DCF.

If it's one thing I know it's that a banker loves an acronym.

Okay? So D, C, F, shorten it, DCF, discounted cash flow.

Where does the discounting part come in? The discounting is we taking future cash flows and we bringing them back to today? What's the company worth at specific date? Usually today's date, as we've already said, it's an intrinsic, that's another word for absolute valuation technique, not relative.

But one of the downsides that come with doing A DCF is that there are a lot of assumptions that go into it.

And your DCF, your valuation can be quite sensitive to those assumptions.

So it's the modeler's view of value as opposed to the market's view of value like you would look at with comps.

Now having said that, we focusing today on the absolute basics, how do you do A D, CF? But there are checks and things you should do to make sure that your numbers make sense.

Also, if you're valuing a listed business, if you get a share price that is radically different to what's in the market, you maybe got a question, some of your assumptions, because is the whole market wrong? Okay? Yes, surely shares are over or undervalued, but if you're just doing a quick analysis, okay, you shouldn't be radically different.

Okay? And also then triangulating with the different techniques to see that we get a reasonable valuation.

Like I said, that's not the focus of today, focuses on actually doing it, but just being aware that it's not just, oh, plug in the numbers, you get an answer. You gotta do some analysis on that. Okay, next section here.

What are we actually getting the value of? If we do a discounted cash flow, we look at the free cash flows, which I'm gonna explain in a moment that gives us enterprise value.

This is what the discounted cashflow valuation gives us.

Now we want to know what the shares are worth.

And so we need to go over that bridge from enterprise value to equity value. So that's what we did in last week's session.

If you wanna go catch up on that afterwards.

So we want equity value.

So we're gonna go over the bridge afterwards.

Now, what are DC, F and wac? So forgive me.

I imagine a lot of you already know how to do discounting, but let's just make a hundred percent sure that everyone is familiar with the concept.

What we have on this slide is not the opposite of discounting.

This is called compounding.

We are looking at future values, right? If I were to invest a hundred today, I think I can earn 10% on that.

What will it be worth in three years time? So you multiply by one plus the rate to the power of three, right? So multiplying by one plus the rate to the power of three, we are doing the opposite of that with DCF.

I'm standing today and I'm saying, what am I willing to pay effectively for the cash flows that I'm going to be getting in future? What are they worth to me now given my required rate of return? So I start in the future and then I do the opposite of compounding.

I discount. So now I'm dividing by one plus the required rate of return to the power of three and that gives me the present value.

What is that discount rate? The discount rate in a discounted cash flow is the wac, the weighted average cost of capital.

We'll have a brief chat about that when we get there. Okay? So we are taking future cash flows and saying, what are they worth to me today given my required rate of return? Next, let's talk about the DCF steps and then we're gonna take each one of these steps briefly talk about it, and then go do it for Coca-Cola.

So step number one, forecast the free cash flows to forecast those free cash flows.

I need to do quite a bit of work and we also need to decide how far into the future we're going to forecast.

So this is our explicit forecast period.

I do a calculation for each year.

Normally we would do five or 10 years, but this does depend on the maturity of the business, which we'll talk about in a moment.

So forecast your free cash flows for that discreet explicit period.

Then we need to calculate the weighted average cost of capital.

That's gonna be out discount rate.

Once we've got the weighted average cost of capital, we're gonna then calculate the terminal value.

The company, the business does not just end at the end of our explicit forecast period, but I also can't keep forecasting every single year into the future into infinity.

So at the end of that explicit forecast period, I say, right, what is the lump sum value of all of the cash flows that come after this period? Okay, what is the value of all the future cash flows after that explicit forecast period? That's the terminal value.

Then we've gotta discount everything back to today.

And then we are gonna go over the enterprise to EV uh, the EV to equity bridge.

We've got enterprise value and then we're going to work out what is the implied equity value.

Uh, questions just come into the pod asking how is WAC calculated for a specific company? Unfortunately we don't have time to go into the detail of that today, but hold onto your question, when it comes to looking at Coca-Cola's whack, we'll have a quick high level chat about what it is, what it represents, okay? But we do need to make quite a lot of decisions in calculating that whack.

Okay, excellent.

Let's now start with working out the free cash flows.

Okay, so free cash flows. What does this word free mean? Let's start with that. Whoops.

So free means available to the providers of finance and for some reason my highlighter doesn't wanna work.

Okay, but that should be okay.

I can just make do with a purple pen. So free cash flows.

So free means free from financing decisions.

It's unlevered cash flow.

I like the term free being interpreted as available to pay all the providers of finance.

So this is what the business is generating before we look at paying interest or paying dividends or paying debt back, right? So it's before any financing impact and it is available, it belongs to the debt and equity providers. That's the definition of free cash flow.

Now, how do we calculate this free cash flow? Well, we start with an operating profit number.

So a clean number, okay? That is, you know, expected to be your recurring ongoing operating profit of the business.

We then need to take tax off that EBIT because we can't just pretend that tax doesn't exist.

Normally in an income statement, tax comes right near the bottom, but I can't just say, oh well I'm not looking at tax.

I have to look at tax, but I just want the tax on this operating profit.

So I'm gonna calculate what the tax on the operating profit is.

That then gives me something called NOPAT or e NEAT operating profit after taxes or earnings before interest after taxes.

The issue with that is that this is not a cash flow, it's a profit figure and I want cash.

So I've gotta make some adjustments.

So I add back the DNA because that is not a cash expense and that's reduced my profit.

So add it back. It's not cash.

But then I have to say, what is the cash impact of my property, plant and equipment? Well that's gonna be capital expenditure, buying new property, plant and equipment, that's the cash outflow.

So we deduct the CapEx.

We then also have to look at the operating working capital.

So the current operating assets and operating liabilities, things like inventory receivables, accounts payable.

What is the requirement year on year to invest in your OWC? That's a use of my cash as well.

Or it could be a source of cash depending on which direction your OWC goes in.

Then if there's any other operating assets or liabilities, remember OWC is just the current items.

So if there's non-current assets or liabilities, you would need to take those into accounts as well.

And then we end up with the free cashflow cash produced by the operations of the business that's available to the providers of finance.

Enough talking. Let's go do some calculations.

Um, unfortunately like some of you have said, if you can't access this um, document, please do just follow along, ask questions.

I will put a link um, in the chat if that link is not working for you.

Um, please just follow along and you can get in touch afterwards and see if we can um, resolve that.

So what am I looking at? I've just gone straight to the DCF page.

We have got Coca-Cola's details.

Now you could do a discounted cashflow from a full three statement model.

So if I had an income statement, balance sheet and cashflow statement, full Coca-Cola forecast into the future, doing a DCF would be super quick 'cause I can just pick the numbers that I need very quickly.

But you don't need to do a full three statement model to do a DCF.

And that's what I wanna show you here.

All you need are those line items that go into calculating free cash flow.

And because we are looking to the future, we obviously have to make some assumptions.

So you can see formatting in any model.

You need to differentiate between, you know, input numbers, hard coded historic numbers, which is the blue font.

Then your forecasts, your assumptions, which is with this light blue background and then calculations that are linking to other cells we format as black.

You can see I've put in historical numbers for only certain items.

Now I have to caveat this guys.

I'm not an equity research analyst.

I didn't spend hours doing this model.

I did it pretty quickly.

I just put in one year of historic numbers.

In reality, you would go back three years to just get an idea of the trends in the business, right? I just did one year of historic numbers in here because I just wanted to see what was going on last year in the company up at the top.

Then I went and where I could, I got equity research analysts forecasts for what they think Coca-Cola's sales growth, EBITDA margin, et cetera is gonna be.

Now where did I access this? If I go into Felix and I look for Coca-Cola, and depending on your access, you might not have access to this, but hopefully you can just follow along on the screen.

Just to show you, if I click on the valuations tab and I scroll down at the bottom here, we've got these earnings estimates and this is a conglomeration of equity research analysts.

What is their consensus forecasts for December 26, 27 and 28.

You can see here we've got revenue growth for the next three years and I think it hasn't changed since I set up my spreadsheet.

So the 2.4, the 1.6, and the 5.3, those numbers there.

And then they give margin estimates as well.

So 35.2, 36.6 and the 37.5.

Here we don't have other estimates, but I did look at other sources like fact sets and I got an idea of CapEx, et cetera.

But at a certain point you also have to just make your own forecasts that you think are reasonable.

And so that is what I did going to the next 10 years, okay? And you can see things are tapering down.

For example, you can't keep growing in the long term at 5.5% because I mean if the economy that you're operating in the GDP is say two and a half percent or 3%, you can't be growing at 5%, right? So I did taper things down.

So those are our forecasts for the various items.

What I'm gonna do now is forecast some key numbers first and then we'll put that into the next section, which is calculating the free cash flow.

Like with any good model, if you do the first year properly, you can then just copy it across for the other years.

So let's focus on doing that first year.

So with sales, I have got a sales growth percentage.

So if I take last year's sales figure and multiply it by one plus the sales growth, I've got my forecast sales for December, 2026 with ebitda.

So earnings before interest tax depreciation and amortization, I have got a margin.

So the EBITDA margin is 35.2% or that's what it's expected to be of the sales.

So that's what a margin is. Percentage of sales.

Now I'm not doing a full income statement, I'm not doing a full balance sheet or cashflow statement.

I'm just forecasting line items.

I'm gonna need to calculate free cash flow.

So the next thing I wanna look at is what do I think capital expenditure is gonna be? Well looking forward, first forecast year, it's expected to be four and a half percent of sales.

Then I need to know DNA as well, depreciation and amortization.

So let's just look at this calculation 'cause this may be a little trickier.

We've got CapEx divided by DNA.

So CapEx divided by DNA is 195%.

So if I want to know what DNA is, I've got CapEx that I know, I've just worked it out.

DNA is X, that's what I don't know, and I know the answer must be 195%.

Do you agree to work out X? If I just take X over to the other side and bring the 1 95 over to the other side, my DNA is gonna be the CapEx divided by 195%.

Okay? And we can do a quick sense check at the end, but let's take that CapEx and divide it by the 195%.

So that gives me 1, 1 3, 2 0.9 and sense check CapEx should be more than DNA in our scenario because CapEx is a bigger percentage.

So CapEx is higher than DNA also look historically, yes, CapEx is more than DNA.

And then finally we are getting the operating working capital balance.

This is the balance sheet balance, right? So this isn't the change in operating working capital.

This is what operating working capital is expected to be on the balance sheet.

And looking forward to the first forecast year, that is negative 13% of sales.

Okay? So those are first forecast years key numbers, that's not free cash flow yet.

We're gonna have to do free cash flow in a moment.

I'll just pause, have a sip of water.

Does anyone have any questions? Please don't be shy in the main chat or in the pod.

I'm gonna carry on. But if you do have questions, please ask.

And if you know I don't answer them immediately, I'll come back at the end of the session.

Okay, so let's then do our free cash flow.

So just very quick recap, we start with the profit number, we then want it after tax and we then add back DNA take off CapEx 'cause that's the real cash flow.

And then we need to change an operating working capital and any other long-term operating items, which we don't have in our case.

So I start with EBIT.

So I don't have an EBIT number, but I've got EBITDA and I've got DNA.

So the difference between EBITDA and EBIT is just the DNA.

So EBITDAs before depreciation and amortization.

If I subtract the DNA, there is my forecast EBIT number.

So I'll just leave the rest of that up on the screen.

Now you might be wondering why am I wasting my time seemingly by deducting DNA? Because all I'm going to do in row 23 is I'm gonna go take that very DNA, I've just deducted and I'm gonna add it back.

So I'm gonna add back the DNA, why would I deduct it up at the top but then add it back further down.

The reason is we want to reflect the tax benefits of that DNA.

Yes, tax is nuanced and sometimes there's a timing difference between when you actually get the tax benefits and when you recognize the accounting DNA.

But to keep things simple, generally speaking, you do get to deduct the cost of your asset over time and that's what DNA is, right? So I don't want to start here with EBITDA because then my tax expense will be too high because then it's like I'm saying, well you can't deduct any DNA for tax and that's not the case.

So I want the EBIT number so that my tax expense correctly reflects the fact that I do get a tax break on the DNA and then separately I'll add the DNA back afterwards.

Separate issue, it's a non-cash item.

Now, if I were doing a full income statement, I would have a tax line in the income statement, but I can't use that tax line because that tax line is after interest.

I don't want that tax line, I just want the tax on this EBIT.

So I go pick up the long run effective tax rate.

So 21% is what we are using and I apply that to the EBIT.

So I get the tax just on this operating profit and then I change the sign to make it a negative because I wanna use a sum function to add up my notepad.

So now we can work out notepad net operating profit after tax, that's the operating profit, the EBIT minus the tax. So if I just do a sum function to add that up, I get noad for the first year.

We've then said DNA, not a cashflow added back.

What is the cashflow? The cashflow is the capital expenditure.

So it's that capital expenditure and I multiply by minus one because it is a cash outflow.

Do not forget to reflect that as a negative because it is a use of cash.

And then finally we've got the change in OWC.

Now this is where you need a bit of accounting knowledge.

So OWC is operating current assets minus operating current liabilities.

Think of it simply as inventory plus receivables.

That sucks up money in a business, money's invested in your inventory and receivables, it's tied up in that.

But then you subtract off any payables because if your suppliers give you credit, that eases your cash flow burden, right? Because I've got credit now, if we look here for Coca-Cola, we can see that they've got negative OWC.

That means on balance they get more credit than money they have tied up in receivables and inventory.

So the current liabilities, operating current liabilities are more what we want is we want the change from year to year.

I don't want the balance sheet figure, I just want the change because I've already got the cash or the cash tied up from the previous year and I just wanna look at what's the difference to the next year.

That's the additional investment or the additional cash that is released.

Now if you have one figure for OWC, you'll always get the right answer.

If you take last year's balance, so the prior year's balance minus the current year's balance, okay, if I've got a net OWC figure last year, minus this year will give you the correct sign.

But we always do a sense check to see if it makes sense.

So I'm seeing effectively a cash inflow positive impact on cash for the first year.

Does it make sense that that's positive? Well, if I look from the prior year on balance, think of it as Coca-Cola owed their suppliers to put it simply 5,400 right forecast at the end of the next year, they expected to owe the suppliers even more.

Think about whether that's good for cash, that is good for cash because Coca-Cola hasn't paid that amount.

They actually in fact owe even more. Okay? So putting it very simply, but that's good, right? You have even more credit from your suppliers.

And so that's why this would be a positive. So cash inflow.

Now that's not a real cash inflow you're gonna see on your bank account, but remember we start with an EBIT number and in that EBIT number in say your cost of goods sold, et cetera, I haven't paid cash for all of that.

Some of that's still unpaid, some of my operating expenses are unpaid.

And so I'm basically correcting that by saying, oh, let me have a look at this movement in operating working capital together with the EBIT.

And that gets me to the correct cash flow position. Okay? So always just doing a sense check with your numbers.

If this was positive OWC, we would expect to see a cash outflow if it gets bigger right from one year to the next.

Okay? I know that can be tricky. If you're new to accounting, any questions, please do ask.

In the interest of time for now though, I'm going to move on to completing our free cash flow so that we can get on to doing our terminal value and our discounting.

So let's add up attention to detail.

Super important, I love using alt equals as a shortcut, but you've gotta be very careful because if there's changes in signs and subtotals, it can sometimes get a bit confused.

I do not wanna add up what it's picked up automatically.

And I also don't want to add everything.

This is a common mistake.

If you are working quickly, you just wanna pick up everything.

But guys, that's not correct because we've already got a subtotal for noad.

So I just wanna add from noad down and that then will give me free cash flow for the first forecast year of 12 6 2 oh 0.1.

So if we've set everything up properly here, we could just select everything and copy it to the right and then it would populate for all the years.

I'll do that in a moment.

Let's just go back to our slides and talk about what the next step is.

The next step is we need to start thinking about the wack. And someone had a question, how do we calculate WAC for a company? So I'm not gonna go through the detailed calculation, we've only got an hour or at this point, 29 minutes left.

So let's just big picture talk about what the weighted average cost of capital is.

The weighted average cost of capital is the required rate of return of your capital providers.

What return do your debt holders, people that give you loans, people that buy your bonds, what percentage return interest rate effectively do they want? And then we take tax off on that because the company gets a tax break.

And the same goes for the cost of equity.

What return do shareholders require for investing in your company's equity? Now most companies have a mix of financing. They've got some debts or some loans, some bonds, and they've got shares. You have to have shares if you're a company.

So all the way to average cost of capital is it's getting a blended cost of funding on average.

What is your pot of funding costing you? Where people often go wrong with the cost of capital when you're first learning it is to think that, oh, let me look at the income statement and see, oh, they're paying interest of X percent.

The guys that could be on a loan that they got five years ago when interest rates were different to what they are now, I wanna know now in the markets, if you were to go borrow, what would your cost of debt be? I wanna know now what do shareholders require? People al also sometimes say, oh well this company doesn't pay dividends, so the cost of equities, nothing.

Of course, it's not nothing.

I'm not gonna give my money to a company and say, don't worry about giving me a return.

If you're not gonna gimme a dividend, then I want you to grow the business and I want my share price to reflect that.

Okay, so cost of equity, required rate of return, and then we just get a blended cost, right? So say half my funding comes from debt, half of it comes from equity.

What's the average? And everything should be at market values.

Now WAC can really change your valuation.

You'll do a sensitivity analysis afterwards for wac, and there's also a lot of decisions to be made when calculating the wac. So just to show you in Felix on this valuations tab, we have a WAC calculator.

Now, a lot of investment banks, I don't wanna say all investment banks made blanket statement, but guys you would have like guidance on, okay, how do we calculate wac? What government bond do we use? Do we use the tenure? Do we use the 20 year? Do we use another government bond? So what we are doing here is we first calculating the cost of equity, then we calculate the cost of debt, and then the weighting happens based on the total debt out of the total capital in the business.

Very briefly, cost of equity, we use the cap M model.

So what would be the rate on a risk-free government bond plus the premium for going into the stock market in general, that's your equity risk premium.

And then the beta of the company you're looking at.

Now, equity risk premium, there's no right answer for this.

I know banks would say, okay, we as a bank add 5.5% equity risk premium.

Okay, I've gone with five point a 5% beta.

I've used the company beta. You can also use an industry beta, okay? But you can see we've got a cost of equity of 7.09 cost of debt, we've got risk for your rate plus the credit spread based on Coca-Cola's credit rating.

And then that gets taken after tax and put into the wack.

So the wack that we've got here is 6.68% and I think that is what I have used in my spreadsheet for the wack of 6.0 6.64.

Let's update that. Okay? If you're working along with me, I did the spreadsheet a couple of days ago just checking, I'm on Coca-Cola 6.68%, let's change that.

Okay, so from 6.64 to 6.68 and let me just show my decimals. There we go. Okay, so that is the wack.

Last thing I wanna say about the wack before we move on to the next phase is why are we using the wack to discount these cash flows? The reason is these cash flows that we are looking at, those free cash flows are the cash flows that belong to the debt and equity investors in Coca-Cola.

So when I'm discounting those cash flows, I need to discount them at the required rate of return of both the debt and equity investors.

It's their cash flows, what's their required rate of return.

So that's why we use the weighted average cost of capital, right? Any questions guys? Please keep them coming.

Like I said, if I don't get chance to answer them now, I can come back at the end of the session.

So let's just quickly take stock of where we are.

We've done the forecast free cash flows, I did it for 10 years, then we've calculated the weighted average cost of capital.

Now we need to calculate the terminal value.

The terminal value is a perpetuity value that represents all the cash flows into infinity after my explicit forecast period.

Now, it's really important that when you do this terminal value calculation, the company or the cash flows have reached a steady state.

That means that there can't be lots of changes happening.

The growth rate can't be super high, for example, because I'm taking one year and saying, okay, this is representative of what's gonna happen forever into the future.

So I can't be having like oh, big cap expense because the company's still expanding.

It's like, no, what's gonna happen when the company settles down forever into the future? What's that gonna look like? So you've gotta forecast out far enough if you say, should I do five years? Should I do 10 years? It depends on the company you looking at.

How soon are things expected to reach a steady state? If you've got a super young company, you're gonna have to forecast out further than if you've got a more mature company.

Okay? So steady state is what we are looking for.

We then have two approaches to calculate the terminal value.

One is the growing perpetuity formula. So this is pure math.

We use growing perpetuity formula.

You take the cash flow, row it into the next year and then discount it back by dividing by WAC minus growth.

Another approach to calculating terminal value is by using a multiple to say what is the EBITDA in the final forecast you expect it to be? And what do I think for a mature business, an EV to EBITDA multiple would be, okay, let's say it's 10 times and then you work out the value as 10 times the EBITDA in your final forecast year.

I would say probably the growing perpetuity method's more common.

But in reality you would do sense checks.

You would say, okay, given me having done this growing perpetuity valuation, what is the implied multiple? Is that reasonable? If I'm coming up with a multiple implied of 35 times, but actually if I look at mature businesses in this industry, they all trade it 10 times, then I've been too aggressive in doing my growing perpetuity probably, right? So you do lots of balances and checks.

In our simple example, let's just do the growing perpetuity formula.

Going back to our spreadsheet, what we now need to do is we need to copy everything to the right, okay? Because I obviously need to get to that terminal U, which is your 10.

So I'm just gonna go up select everything. So I'm gonna press shift to select from row 13 down and then holding and shift arrow key to the right and then control R or command R if you're on a Mac, I think to copy to the right.

And in our final year we can see we've then got that free cash flow of 17 4 9, 1 0.8.

So what we need to do now is we need to take that free cash flow and we need to do the terminal value calculation.

We need a wac, which we've got and we need a long-term growth rate.

Now, which long-term growth rate should you use? Again, your valuation's gonna be very sensitive to this.

You've gotta think about this long-term growth rate as forever into perpetuity.

What are the cash flows of this business gonna be growing at? It should probably be somewhere between inflation and the GDP of the countries that this business operates in, right? Including inflation.

So if you growing at bigger than the GDP of the economies where you operate, you eventually gonna overtake the economy and the world.

So I would say probably between inflation and nominal GDP here, we've chosen a 2.6% growth rates and again, more advanced DCF concepts.

You would wanna check that your investment in capital, okay, in the invested capital in your final year is sufficient to support this growth.

That's looking at the value driver formula.

More advanced guys, that's stuff you can look forward to today.

We are just doing the absolute basics, but you can't just suck that that number out and think, okay, we are gonna grow 2.6%.

You should check in your final year.

I is there sufficient reinvestment in the business to actually grow at 2.6%? But anyway, let's keep it simple.

Use the 2.6, calculate our terminal value.

Now I want to calculate the terminal value here.

Don't be tempted to calculate the terminal value under the 2.6, okay? Because you could then run into a problem, which I will explain in a moment.

Let's calculate that terminal value.

So we've said terminal value, take that terminal cash flow, multiply it by one plus growth.

Take note of where I'm putting my brackets, you have to put a bracket before the one.

Okay, so one plus growth, go pick up your growth, that's the 2.6. You'll see it's coming up as G instead of E 31.

The reason it's coming up as G is because it's a named cell, we gave it the name G, so it's just appearing as G, otherwise it would come up as E 31.

And then you divide by again open bracket, so close brackets around the one plus G, and then you're gonna open bracket before you do WAC minus G.

So we've got the WAC of 6.68 and that is also a named cell called WAC instead of E 28.

And then you minus the G of 2.6%, close your brackets again and you should get a terminal value of 4 3, 9, 8, 6, 8 0.3.

We are nearly there.

Any questions please do ask.

Let's go back to our slides.

So we have done these first three steps.

Now the last second last step is we need to do the actual discounting.

When you do the discounting, we are gonna discount at the weighted average cost of capital.

That's why we needed to calculate it.

And there are two steps to the discounting.

First step to the discounting is to take the individual cash flows from every single year, discount each one of them, add them all together.

That's the present value of those cash flows for the next five, 10 years.

What you must not forget to do, which is a common mistake when people first start learning about DCF, is do not forget to discount your terminal value as well.

That terminal value, it feels like we've already done a present value calc because to a certain extent we have we divided by WAC minus G, but when we did that calculation, we were standing at the end of year five, looking into the future, I took or it, let's use our example with Coca-Cola year 10, I stood at the end of year 10.

I then looked one year into the future by multiplying by one plus growth, then I divided by WAC minus growth and that then just brings it back to year your 10, I want the value of Coca-Cola today, not in 10 years time.

So I need to take that terminal value and discount that back to the present value as well.

And then you add the two together that gives you your total enterprise value.

Let's do that for Coca-Cola.

So first things first, let's look at the individual cash flows. Before we do that, let's calculate a discount factor.

You could do an NPV function here instead of doing it for each individual year, but it's often nice to see the impact of the discounting.

And also I think this is what's gonna be covered in next week's session, but just have a look at the bullet points of what's gonna be covered, but discounting to a specific date here, we keeping things simple, I'm just discounting everything for a year from December 26th back to today.

But today is actually December 25.

And guys, we in Feb, I nearly said we in February, we in March, well actually a week into March almost.

Okay, so we are on the 6th of March.

You might wanna discount to a specific date to the 6th of March and you can't do that with an NPV, simple NPV function.

Okay? So we keeping things simple, we could use an NPV here, but we are gonna do it separately so that we can just see the discounting.

And then if you wanted to change this first period to discount for less than a year, you can play around with that.

Okay? So discount factor one divided by one plus the discount rate.

And our discount rate is the wac.

And you can see it's coming up as wack because it's a named cell and you put that to the power of the year that you are in.

Now, if it wasn't a named sell, if WAC wasn't there and it came up as sell, what is that E 28, you would have to use your dollar signs to lock, right? But because it's named, it'll be locked onto that sell.

Then what I need to do is I need to take the cash flow for year one and I need to multiply that by the discount rate for year one.

And if we copy that to the right, we would've done that for every single year.

And just do a sense check.

Always your discount factors should be getting smaller and smaller, right? The further you go to the right, so should be getting smaller and smaller.

If you forgot to lock onto that wax cell, if it wasn't named, you'd be seeing ones here and that's wrong, right? So sense check and we've got our discounting applied now.

So I've seen a question come in the CH in the q and a part.

I'm definitely not ignoring you.

I just wanna finish this up and then I'll definitely get to it.

So if we go select all of those, those are the discrete cash flows for the next 10 years.

Let me add them together here.

Some of the present value of those cash flows, okay? So that's step number one.

The cash flows for the next 10 years in today's terms are worth 1 0 8, 2 8 2.

Then we also need to take that terminal value that is sitting at the end of year 10 and discount that back to today, right? So I need to take that cash flow and I need to multiply that with the year 10 discount factor, the 0.52 to see what that lump sum value is worth in today's money.

And there we have it.

If I add the two together, that gives me and be careful again, can you see working quickly? Especially if you're working late at night.

Alt equals brilliant but not so brilliant because it hasn't picked everything up.

So just make sure you go pick up row 39 and row 40 and that gives me the total enterprise value today.

Let's see this question in the pod.

So the free cash flow for the individual years are quite small compared to the terminal value.

Can you just count the terminal value and use that as your final enterprise value since the free cash flows don't contribute a ton.

So as you can see here, it does feel like these cash flows are quite insignificant compared to that terminal value.

But actually if you look over the 10 years, these cash flows do contribute, like in this case a third of the total value.

So if I'm understanding your comment correctly, if you were to just kind of ignore these and say let's just do the terminal value, you'd actually be missing out on 10 years of cash flows.

And also take note that even though these cash flows look quite small, they also have a bigger discount fact or big, you are discounting by less.

So this cashflow is almost worth a hundred percent.

And so the early years cash flows can actually be quite substantial.

Also in these early years you might have very high growth.

So the cash flows are higher than what's in gonna be going into that terminal value.

And so it might feel insignificant, but I definitely don't think you could ignore them.

How, how long you do this forecast before you just get to the terminal value.

That depends on the maturity of the business because things have to have stabilized, they have to have a reach that steady state because then you've got that representative year going into the future forever.

Okay? So hopefully that addresses your question somewhat, but please do let me know if you have a comeback question.

Guys, we are nearly there.

I definitely don't want to finish over more than an hour.

So let's wrap things up. We almost there. Let's see how far off we are from the actual share price of Coca-Cola. Given our very simple valuation we have got last thing to do, we've now got the value today.

But remember that is the enterprise value.

That's the value of the business that belongs to both the debt and equity providers.

I just want the value of the equity because I wanna know what the share price is or what the implied share price is.

So I've gotta go over this bridge that was last week's Felix live session.

So to walk over this bridge from enterprise value to equity value, if you were in the session last week, hopefully this is burned into your memories, that diagram with the left hand side having enterprise value, then you need to add whatever other assets there are that isn't captured by the operations on the left hand side, on the right hand side, you've then gotta take off anything that doesn't belong to the shareholders.

So what do I owe the debt holders, NCI, pensions, et cetera.

Now where did I get these numbers from? These are from the latest balance sheet of Coca-Cola, but I've used Felix, you should always check your numbers right as an analyst. Scrub your numbers, check them.

I've used Felix, okay, I think they're correct, but I'm not gonna go into the balance sheet now.

So just looking here, I've picked up the short-term financial assets and cash.

If you go to Coca-Cola's balance sheet, latest balance sheet, you will see they've got cash, some short-term investments, marketable securities, also long-term financial investments, equity method investments and other instruments.

Okay? Those have not been captured in our DCF.

Think about it. Nowhere in my DCF did I forecast investment income.

There's no interest income, there's no equity associate income from equity associates where you own uh, 20% or more of a company normally.

Hey, I haven't, I haven't built that into my valuation.

So this is sitting outside the enterprise value.

I need to add it on. And then I need to look and say okay, what belongs to other people? I've got the NCI, so outside shareholders, not Coca-Cola shareholders that own parts of subsidiaries.

I've got debt, long-term debt, short-term debt finance leases.

And then Coca-Cola has got an underfunded pension and other post-employment benefits.

This is getting very technical, but basically this is a claim on the business.

Coca-Cola has guaranteed that they will pay certain benefits to people post-retirement and if they don't have enough assets built up to cover that in the pension plan, then that's an obligation on the business and I need to cater for that, right? So taking all of these items, let's go over the bridge to calculate equity value.

I've got the enterprise value, I need to add on to that enterprise value, these other assets that have not been captured in my DCF, that will then give me the total of the operations and all the other assets in the business.

Then I just want what part of that value belongs to equity holders.

So I need to subtract the sum of whatever belongs to the debt holders, whatever belongs to the non-controlling interest and whatever that pension liability is, that then will give me the implied equity value for Coca-Cola.

We then need to take the number of fully diluted shares outstanding for Coca-Cola and I think this might have changed since I did my analysis.

Let's have a look. Diluted shares outstanding for Coca-Cola is 4 3 1 5 0.3.

So 4 3 1, 5 0.3, it was 0.9.

Okay, so 4 3 1, 5 0.3 and now we can get an implied share price for Coca-Cola and we get an implied share price of $75.70.

It's implied because it's my valuation, it's not what the actual share price is.

Let's go have a look at what the actual share price for Coca-Cola was as of yesterday's close.

So this has been updated.

So it was 77.030 that's actually fallen quite a bit.

I mean I suppose with what's going on in the markets though, 77.03.

Okay. And so let's see my valuation versus the current share price, we are saying that we think the share price should be 1.8% lower.

But guys that's not bad for quite a rough DCF calculation.

Please. I think this goes without saying, this is obviously just for training purposes.

I am by no means recommending that anybody goes and sells or buys or does anything with Coca-Cola shares. Kay, this is not investment advice, this is just teaching purposes.

Um, and something to think about.

And then I see another question in the chat and then we'll wrap up.

Something to think about is the fact that, um, I mentioned this in last week's session.

When you go over the bridge, you actually should be looking for market values of things.

And guys we've got in here, those long-term financial assets included in those long-term financial assets of Coca-Cola, they've got around about 20% investment in Monster.

That is not reflected at the current market value of Monster in Coca-Cola's financials. The way you account for those investments, you don't mark them to market.

So if we were to go look at what the current market value of Monster is and then take Coca-Cola share of that and update that value, we would actually get a higher valuation.

So that could be part of the explanation for why we are coming in at less than what the market price is.

One question in the chat, what's the difference between fully diluted shares and total shares? So very high level shares outstanding.

If we click through here, that is the actual number of shares outstanding for Coca-Cola front page of the 10 K as of the 18th of February.

Okay? So that's the actual number of shares that have been issued minus any that Coca-Cola's bought back that's sitting in treasury.

So those are the shares actually outstanding.

Now, however, Coca-Cola has got employee stock options and other employee incentives and those cause dilution because effectively if we look at this information in Felix, if we look at the share options, Coca-Cola employees that hold these options, and it would be typically senior employees, they have got the right to buy shares at $55.74 per share when in actual fact Coca-Cola share price is $77.

So if these options were exercised, they would cause dilution.

And so there's a calculation that you can do to work out how dilutive that would be.

Okay, so this is the shares that share price of 77.03.

The market's aware of these options and the restricted stock units, et cetera.

So it's priced into the share price.

And so we also then need to adjust the number of shares to reflect those potential shares in future, okay, that are dilutive.

Okay? So I know that's very high level, but hopefully that satisfies um, your curiosity somewhat.

So guys, we have got three minutes left.

Let's have a quick just wrap up of what we did.

We did this for Coca-Cola.

We forecast the free cash flows, lots of assumptions that have to go into there.

We calculated the whack again, lots of assumptions, we calculated that terminal value.

We got the present value of the enterprise.

We went over the bridge and we got the implied share price.

In reality, you wanna do some checks.

Have we reached a steady state? Look at some ratios.

I know people have different access to Felix, but just to show you if you are interested in learning more, if you go under topics in investment banking valuation, all we've done today is this very top DCF fundamentals for the person that was asking about calculating diluted number of shares, you'll find that under trading comps, we go into dilution there.

If you scroll further down, you'll see here there's a um, playlist on wac. There's a playlist on DCF.

So this is now more detailed going into things like if we look at discounting for midyear adjustments, doing implied multiples, Doing some of those sense checks.

So that's a more advanced playlist. And then If you scroll even further down, We have got some more advanced DCF advanced valuation techniques going into things like value driver formulas and then also advanced DCF, which you're gonna be having a look at in next week's Felix live.

So that is it from my side.

Thank you very much for joining.

I hope you found that useful. I hope to see you on Future sessions. I'll stick around Now in case there's any questions.

You're welcome. Thanks for that comment and have a great rest of your day and lovely weekend and hope to see you soon.

Thanks very much.