# Discounted Cash Flow (DCF) Financial Model

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```									Discount Rate Calculation

Note: all cells in blue font with blue titles are assumptions that the user must fill in

Calculation of Beta from Comparables
(in \$000s)

Comparable Companies                Levered Beta      Equity Market Capitalization     Total Debt   Tax Rate     Unlevered Beta
xxx                             1                         1                       1         35%            0.606
xxx                             1                         1                       1         35%            0.606
xxx                             1                         1                       1         35%            0.606
xxx                             1                         1                       1         35%            0.606
xxx                             1                         1                       1         35%            0.606
xxx                             1                         1                       1         35%            0.606
xxx                             1                         1                       1         35%            0.606
xxx                             1                         1                       1         35%            0.606
xxx                             1                         1                       1         35%            0.606
xxx                             1                         1                       1         35%            0.606

High Unlevered Beta                                     0.606
Mean Unlevered Beta                                     0.606
Median Unlevered Beta                                   0.606
Low Unlevered Beta                                      0.606

Calculation of the Cost of Equity

Risk-Free Rate (Rf)                                       5%
Target's Estimated Unlevered Beta (βu)                  0.606
CAPM = Rf + ((βu) * (Rm - Rf))                          0.056

Cost of Debt of Target Company                             8%

Calculation of the Weighted Average Cost of Capital (WACC)

Target Company                       Equity                 Total Debt               Tax Rate
MyCo                              1                        1                      35%

Weighted Average Cost of Capital =           ((Equity/Enterprise Value)*(Cost of Capital)) + ((Debt/Enterprise Value)*(Cost of Debt)*(1-taxrate))
Enterprise Value = Equity + Total Debt                      2
WACC                                            0.054030303
Discounted Cash Flow Calculation

Income Statement
(in \$000's)
Year ending December 31,
2007        2008           2009           2010         2011        2012        2013        2014

Revenue                                              \$100        \$150            \$200           \$200         \$200       \$200        \$200        \$200

Cost of Sales                                              0           0              0             20           20          20          20          20
Gross Profit                                          100         150             200            180          180        180         180         180

Operating Expenses
Research & Development                     0           0              0             24           24          24          24          24
Sales & Marketing                          0           0              0             26           26          26          26          26
General & Administrative                   0           0              0             28           28          28          28          28
Total Operating Expenses                                   0           0              0             78           78          78          78          78

Operating Income                                      100         150             200            102          102        102         102         102

Interest Expenses
Interest Expense                           0           0              0              0            0           0           0           0
Interest Income                            0           0              0              0            0           0           0           0
Net Interest Expense                                       0           0              0              0            0           0           0           0

Pretax Income                                         100         150             200            102          102        102         102         102

Taxes                                                      0           0              0              0            0           0           0           0

Net Income                                            100         150             200            102          102        102         102         102

Revenue Growth                                                        0.5   0.33333333          0.0%         0.0%       0.0%        0.0%        0.0%
Gross Margin                                       100.0%      100.0%          100.0%          90.0%        90.0%      90.0%       90.0%       90.0%
R&D/Revenue                                          0.0%        0.0%            0.0%          12.0%        12.0%      12.0%       12.0%       12.0%
S&M/Revenue                                          0.0%        0.0%            0.0%          13.0%        13.0%      13.0%       13.0%       13.0%
G&A/Revenue                                          0.0%        0.0%            0.0%          14.0%        14.0%      14.0%       14.0%       14.0%
Operating Margin                                   100.0%      100.0%          100.0%          45.0%        45.0%      45.0%       45.0%       45.0%
Pretax Margin                                        0.0%        0.0%            0.0%            0.51         0.51       0.51        0.51        0.51
Net Margin                                           0.0%        0.0%            0.0%          51.0%        51.0%      51.0%       51.0%       51.0%

Relevant Sections from Balance Sheet

Year ending December 31,
2007        2008           2009           2010         2011        2012        2013        2014

Current Assets
Cash                                         \$0          \$0             \$0             \$0           \$0          \$0          \$0          \$0
Accounts Receivable                           0           0              0             \$0           \$0          \$0          \$0          \$0
Inventory                                     0           0              0             \$0           \$0          \$0          \$0          \$0
Other Current Assets                          0           0              0              0            0           0           0           0
Total Current Assets                                       0           0              0              0            0           0           0           0

Current Liabilities
Accounts Payable                           \$0          \$0             \$0             \$0           \$0          \$0          \$0          \$0
Short Term Debt                             0           0              0             \$0           \$0          \$0          \$0          \$0
Current Portion of Long Term Debt           0           0              0             \$0           \$0          \$0          \$0          \$0
Other Current Liabilities                   0           0              0              0            0           0           0           0
Total Current Liabilities                                  0           0              0              0            0           0           0           0

Property, Plant & Equipment Schedule
Gross Property, Plant & Equipment                         \$0          \$0             \$0             \$0           \$0          \$0          \$0          \$0
Accumulated Depreciation                   0           0              0              0            0           0           0           0
Net Property, Plant & Equipment                            0           0              0

Net Capital Expenditures                   0           0              0              0            0           0           0           0
Depreciation Expense                                   0              0              0            0           0           0           0
Free Cash Flow Calculation                                                                                   Year ending December 31,
2007           2008           2009            2010         2011           2012           2013         2014
Net Income                                                           100.0         150.0          200.0           102.0         102.0          102.0         102.0        102.0
(+) Non-Cash Charges, like Depreciation                                  0.0            0.0            0.0             0.0          0.0              0.0          0.0          0.0
(+) After-tax Interest Payments on Debt                                  0.0            0.0            0.0             0.0          0.0              0.0          0.0          0.0
(-) Investments in Fixed Capital                                         0.0            0.0            0.0             0.0          0.0              0.0          0.0          0.0
(-) Investments in Working Capital                                       0.0            0.0            0.0             0.0          0.0              0.0          0.0          0.0
(Current Assets - Current Liabilities)
Free Cash Flow                                         100.0         150.0          200.0           102.0         102.0          102.0         102.0        102.0

Discounted Cash Flow Calculation

Discount Rate                                                          5.4% from "Discount Rate" tab

Terminal Growth Rate                                                   4.0%           5.0%            6.0%
Terminal Value                                                      7,560.8      26,573.7        (18,111.5)
Present Value of Terminal Value                                      4,963         17,443          (11,889)
Sum of the Present Value of Free Cash Flows                            774            715             604
Entity Value                                                        5,737         18,159          (11,284)
(+) Excess Cash                                                            0              0               0
(-) Debt                                                                   0              0               0

Equity Value                                                        5,737         18,159          (11,284)

Note: if the terminal growth rate is larger than the discount rate, then the calculation for the terminal value will not make sense.
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