Page 46 - FINAL CFA II SLIDES JUNE 2019 DAY 6

LOS 25.i: Calculate free cash flows for a target company and estimate the
company’s intrinsic value based on discounted cash flow analysis. READING 25: MERGERS AND ACQUISITIONS

Discounted cash flow (DCF) analysis:
Step 1: Determine which free cash flow model to use. MODULE 25.3: TARGET COMPANY VALUATION
Step 2: Develop pro forma financial estimates.
Step 3: Calculate free cash flows using the pro forma data.

Note that unlevered net income = EBIT * (1-t) and that you may be required to work back tax rate (you divide taxes by net income before tax).

Step 4: Discount free cash flows back to the present at the appropriate discount rate.

Step 5: Determine the terminal value and discount it back to the present.

Step 6: Add the results from Step 4 and 5 to determine the value of the target firm!