There are different methods of estimating the cost of equity do you use. You must know more than one and why you are picking the one you use.
We address this question: Which method of estimating the cost of equity do you use? Why?
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Do you use market value weights or book value weights of debt and equity to arrive at the weights when computing WACC?
The weight of debt and equity are important components of the WACC. The WACC which you use as your discount rate in most DCF models plays a big role in the resulting valuation. It is important to get this right. Would you prefer to use the market value weights or book value weights of debt and equity to arrive at the weights when computing WACC?
We address this question here on this page: “Do you use market value weights or book value weights of debt and equity to arrive at the weights when computing WACC?
Are short-term debt and current portion of long-term debt included in debt when computing the weight of debt?
The weight of debt is an important component of the WACC formula. In estimating the weight of debt, would you consider short-term debt and the current portion of long-term debt as debt? What about notes payable and accounts payable?
On this page, we consider this question: “Are short-term debt and current portion of long-term debt included in debt when computing the weight of debt?”
What are Discount Rates? How will you explain it to a layman?
The discount rate is the cost of capital when valuing assets. This is a technical explanation finance professionals will understand. How will you explain it to a layman?
This page addresses this question. “What are Discount Rates? How will you explain it to a layman? “
Is there really a Risk-Free Rate?
You use the risk-free rate to estimate your discount rate when using the CAPM. Is there really a Risk-Free Rate?
What is Market Risk Premium or MRP? How would you explain it to a layman?
MRP stands for market risk premium or equity risk premium. The market risk premium is the premium expected as a reward for taking on the ‘market risk’ in an equity investment.
What are the different ways you can estimate terminal value in a DCF valuation?
It is important to get the terminal value estimate right because the terminal value accounts for a large part of firm value. The terminal value as a percentage of firm value could be anywhere from 50-80% and can be estimated using a number of ways.
We address this question here. “What are the different ways you can estimate terminal value in a DCF valuation?”
What factors drive the percentage of your total value the terminal value represents?
The terminal value accounts for a large part of firm value. The terminal value as a percentage of firm value could be anywhere from 50-80%. If your terminal value is higher than 80% of the firm value, it will be considered on the higher side and you will need to explain why.
We address, on this page, the question: “What factors drives the percentage of your total value the terminal value represents?”
When do you need to iterate on the value of debt and equity?
You need the value of debt and equity to build a DCF valuation model. Why and when is there a need to iterate on the value of debt and equity in a DCF valuation?
We address this question in this post. “When do you need to iterate on the value of debt and equity in a DCF valuation??
How can you check if your terminal assumptions are reasonable? (other than as a percentage of total value)
There is no right answer. How do you check if you are on the right track? Why is this important? The terminal value as a percentage of firm value could be anywhere from 50-80% usually. The terminal value as a percentage of firm value could be lower or higher under specific conditions too. Look at the terminal value as a percentage of firm value to make sure your DCF is not too dependent on future projections of terminal cash flow.
How else can you check if your terminal assumptions are reasonable?