Valuation Methods — DCF, Comps, Precedents

Discounted Cash Flow (DCF)

• DCF values a company based on the present value of projected unlevered free cash flow plus terminal value. It is an intrinsic valuation method and is highly sensitive to assumptions for growth, margins, discount rate, and terminal value.
• Unlevered free cash flow generally starts with EBIT, subtracts taxes, adds back non-cash charges such as depreciation and amortization, subtracts capital expenditures, and adjusts for changes in net working capital.
• The discount rate is usually WACC for enterprise value analysis because the cash flows are pre-debt. Terminal value is commonly calculated using either a perpetuity growth formula or an exit multiple approach, and both should be cross-checked for reasonableness.

Trading Comparables (Comps)

• Comps value a company by comparing it to publicly traded peers with similar business mix, growth, margin profile, size, geography, and cyclicality. Common enterprise value multiples include EV / EBITDA, EV / EBIT, and EV / Revenue.
• Equity value metrics such as P / E and price / book are useful when capital structure is less important, but enterprise value metrics usually provide cleaner comparisons across issuers with different leverage.
• Selection matters. Outlier peers, different accounting policies, one-time charges, or distinct business models can distort the range, so normalization and judgment are critical.

Precedent Transactions

• Precedents look at multiples paid in prior M&A transactions for similar targets. They often yield higher valuation ranges than comps because buyers may pay a control premium to obtain control, expected synergies, or strategic positioning.
• Analysts focus on announced deal value, implied enterprise value, transaction circumstances, and whether the deal environment resembled the current market. Distressed or highly unusual transactions may not be reliable precedents.

Series 79 focus

• Know when enterprise value versus equity value is appropriate, how to bridge between them, and why DCF, comps, and precedents may produce different valuation ranges. Exam questions often test methodology selection, key assumptions, and how capital structure or synergies affect valuation conclusions.