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I have an IB interview coming up where I will have a surprise case study. Can anyone please share what has come up for them in the past?
I have an IB interview coming up where I will have a surprise case study. Can anyone please share what has come up for them in the past?
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Ah, diving into the world of DCF valuations, are we? Let's swing through the jungle of numbers and methodologies to help you ace this case study. Based on the most helpful WSO content, here's how you can approach this thrilling adventure:
1) Approaching the DCF Valuation:
Start with the Basics: Given you have Revenue, EBITDA, and OpEx numbers, you'll first need to calculate the Free Cash Flow (FCF). Remember, FCF = EBITDA - OpEx - Taxes + Depreciation & Amortization - Capital Expenditures - Changes in Working Capital. Since some of these numbers might not be directly provided, you'll need to make reasonable assumptions based on industry standards or the information available from the company's balance sheet at Companies House.
Forecasting Cash Flows: With the current financials in hand, project the company's FCF for the next 5-10 years. Given the company's ambition to grow revenues to £15/£20m, use this as a basis for your revenue growth assumptions. Adjust EBITDA margins according to expected operational efficiencies or expansions.
Terminal Value Calculation: After the explicit forecast period, calculate the terminal value assuming the company continues to generate cash flow into perpetuity. This can be done using the Gordon Growth Model or an exit multiple approach based on comparable companies.
Discounting Cash Flows: Once you have your projected FCFs and terminal value, discount them back to their present value using the WACC.
2) Calculating the WACC:
Cost of Equity: Since there's no debt in the business, the WACC, in this case, would essentially be the cost of equity. You can calculate the cost of equity using the Capital Asset Pricing Model (CAPM): Cost of Equity = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). For the risk-free rate, use the yield on UK government bonds. Beta can be estimated based on comparable companies in the industry. The market return can be the historical average return of a relevant stock market index.
No Debt: As there's no debt, you won't need to calculate the cost of debt or adjust for tax shields in your WACC calculation.
3) Additional Questions for Better Valuation:
Remember, the key to a successful DCF analysis lies in making informed assumptions and clearly articulating your rationale for those assumptions. Good luck with your case study, and may your valuation swing closer to the true value of this intriguing company!
Sources: Walk me through a DCF, DCF Modeling Course ~ Pre-training text.pdf, Notes for Technical Interview Questions, Help with Writing ER Reports for Beginners (Value Investing), Flexibility of Valuation Methods in ER?
Do you have the income statement? You can make the cash flow from the BS + IS.
Also, you could get the 15/20mn revenue and calculate the projected CAGR from the 12mn. Then can assume this as your growth rate for the next few years (as the company has high scalability etc). As long as you state that assumption it isn't unreasonable
also for the wacc, if you are only doing Cost of Equity, should be fairly simple. RFR + Beta * ERP. You need to take the average betas of similar companies and unlever them to then get a beta that you can use in your Cost of Equity formula
Would advise you use a base, upside and downside case here to show you thought thoroughly
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