Hmm - thanks for explaining, but isn't your definition in the end completely backwards? At roughly 11.10 you give the definition and the different steps required, but you mix up Levered and Unlevered cash-flow. Levered cashflow is after interest expense, while unlevered is calculated before - your definitions has it exactly backwards, but then gives the right step by step solution.
By discounting a CF you inherently account for interest. So the unlevered CF is always discounted with wacc(equity +debt) and the levered is discounted by the equity rate (i.e shareholders disered return) since you have reduced the CF with the interest expense.
When considering whether to use an unlevered DCF (Discounted Cash Flow) model or a levered DCF model, it's important to assess the specific context and objectives of the valuation. Here are a few scenarios where an unlevered DCF model might be more appropriate: Valuing a company without debt: If the company being valued has no outstanding debt or if the debt is immaterial to the overall valuation, an unlevered DCF model can be used. This approach focuses solely on the company's operating cash flows and does not incorporate the impact of debt financing. Comparing companies with different capital structures: When comparing companies with varying levels of debt or different capital structures, using an unlevered DCF model can provide a more accurate basis for comparison. By removing the influence of debt, the focus is solely on the underlying business fundamentals, enabling a fairer evaluation. Analyzing investment opportunities across industries: When evaluating investment opportunities across different industries, an unlevered DCF model may be more appropriate. Industries may have varying levels of debt usage and interest rate sensitivity, making it challenging to compare companies using a levered DCF model. An unlevered approach allows for a more consistent and objective analysis. Assessing the intrinsic value of an entire business: If the objective is to determine the intrinsic value of an entire business, including both equity and debt, then a levered DCF model should be employed. This model incorporates the impact of debt financing costs, such as interest expenses and tax shields, into the valuation.
@@SteveCoughranhey Steve, I’m an accounting student entering my second year of CC. When I read about unlevered DCF valuation, I noticed when analyzing that the goal for this method of valuation is to remove all debt (which you mentioned above) in order to look at how a company is & can perform without any debt involved (taking those “excuses” away & seeing if that company can perform like they say they can). Hence, why people emphasize EBITDA so much. Now, I would like to know how can an analyst research & locate good assumptions and drivers for these models? Btw, very elaborate & concise video. Thank you
@@khalilfuller4939 You're on the right track with your understanding of unlevered DCF analysis! This method aims to assess a company's value by looking at its performance without the impact of debt, which helps to isolate the true operational efficiency of the business. When it comes to researching and locating good assumptions and drivers for these models, there are several key strategies to consider. Start by looking at industry-specific reports from reputable sources, which often provide insights into growth rates, market trends, and competitive landscapes, crucial for making accurate assumptions. Analyzing the company’s historical financial statements can also provide a solid foundation for forecasting future performance. Additionally, pay attention to any guidance provided by the company’s management during earnings calls or in annual reports, as they often have the best understanding of their company's future prospects. It's also important to consider broader economic indicators such as GDP growth rates, interest rates, and inflation, as these factors can significantly influence a company's performance. Comparing the company to its peers in the same industry can provide benchmarks for key metrics like revenue growth rates, profit margins, and capital expenditures. Lastly, reviewing analyst reports and market sentiment can provide valuable context and insights, though these should not be the sole basis for your assumptions. Glad you found the video helpful! Keep diving deep into your studies and these analyses will become second nature. Best of luck with your accounting journey!
@@SteveCoughran will do Steve 🫡 thank you for responding & the valuable information. I will be doing some research on them reports then because that was my biggest concern, being able to learn the insides & out of an industry without the practical experience right now
Thanks! This really helped me as I did not get what my instructor was saying :P
Glad it helped!
Hmm - thanks for explaining, but isn't your definition in the end completely backwards? At roughly 11.10 you give the definition and the different steps required, but you mix up Levered and Unlevered cash-flow. Levered cashflow is after interest expense, while unlevered is calculated before - your definitions has it exactly backwards, but then gives the right step by step solution.
Got the same impression here
By discounting a CF you inherently account for interest. So the unlevered CF is always discounted with wacc(equity +debt) and the levered is discounted by the equity rate (i.e shareholders disered return) since you have reduced the CF with the interest expense.
Amazing video!
Thank you!
HI......when is wrong to use levered dcf???
Thanks.
When considering whether to use an unlevered DCF (Discounted Cash Flow) model or a levered DCF model, it's important to assess the specific context and objectives of the valuation. Here are a few scenarios where an unlevered DCF model might be more appropriate:
Valuing a company without debt: If the company being valued has no outstanding debt or if the debt is immaterial to the overall valuation, an unlevered DCF model can be used. This approach focuses solely on the company's operating cash flows and does not incorporate the impact of debt financing.
Comparing companies with different capital structures: When comparing companies with varying levels of debt or different capital structures, using an unlevered DCF model can provide a more accurate basis for comparison. By removing the influence of debt, the focus is solely on the underlying business fundamentals, enabling a fairer evaluation.
Analyzing investment opportunities across industries: When evaluating investment opportunities across different industries, an unlevered DCF model may be more appropriate. Industries may have varying levels of debt usage and interest rate sensitivity, making it challenging to compare companies using a levered DCF model. An unlevered approach allows for a more consistent and objective analysis.
Assessing the intrinsic value of an entire business: If the objective is to determine the intrinsic value of an entire business, including both equity and debt, then a levered DCF model should be employed. This model incorporates the impact of debt financing costs, such as interest expenses and tax shields, into the valuation.
@@SteveCoughranhey Steve, I’m an accounting student entering my second year of CC. When I read about unlevered DCF valuation, I noticed when analyzing that the goal for this method of valuation is to remove all debt (which you mentioned above) in order to look at how a company is & can perform without any debt involved (taking those “excuses” away & seeing if that company can perform like they say they can). Hence, why people emphasize EBITDA so much. Now, I would like to know how can an analyst research & locate good assumptions and drivers for these models?
Btw, very elaborate & concise video. Thank you
@@khalilfuller4939 You're on the right track with your understanding of unlevered DCF analysis! This method aims to assess a company's value by looking at its performance without the impact of debt, which helps to isolate the true operational efficiency of the business. When it comes to researching and locating good assumptions and drivers for these models, there are several key strategies to consider. Start by looking at industry-specific reports from reputable sources, which often provide insights into growth rates, market trends, and competitive landscapes, crucial for making accurate assumptions. Analyzing the company’s historical financial statements can also provide a solid foundation for forecasting future performance. Additionally, pay attention to any guidance provided by the company’s management during earnings calls or in annual reports, as they often have the best understanding of their company's future prospects. It's also important to consider broader economic indicators such as GDP growth rates, interest rates, and inflation, as these factors can significantly influence a company's performance. Comparing the company to its peers in the same industry can provide benchmarks for key metrics like revenue growth rates, profit margins, and capital expenditures. Lastly, reviewing analyst reports and market sentiment can provide valuable context and insights, though these should not be the sole basis for your assumptions. Glad you found the video helpful! Keep diving deep into your studies and these analyses will become second nature. Best of luck with your accounting journey!
@@SteveCoughran will do Steve 🫡 thank you for responding & the valuable information. I will be doing some research on them reports then because that was my biggest concern, being able to learn the insides & out of an industry without the practical experience right now