Page 51 - 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 for the analysis. 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 also equals earnings before interest and taxes multiplied by 1 minus the tax rate and that you may be required to back
into the tax rate by dividing 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 discounted FCF values for the first stage and the terminal value to
determine the value of the target firm.