CFM Valuation & Performance Measurement Flashcards

What is the discounted cash flow (DCF) method of valuation?

Answer: Estimating an asset's intrinsic value by discounting projected future cash flows to present value

DCF valuation sums the present value of all expected future free cash flows, discounted at an appropriate rate reflecting the investment's risk.

What does the Price-to-Earnings (P/E) ratio indicate about a stock?

Answer: How much investors are paying per dollar of current earnings

The P/E ratio reflects market expectations of future growth and profitability; a higher P/E suggests higher growth expectations or potential overvaluation.

Why is EBITDA commonly used in company valuation?

Answer: It approximates operating cash flow and allows comparison across firms with different capital structures and tax situations

EBITDA removes the effects of financing decisions, accounting choices, and tax environments, making it a useful proxy for operating performance across companies.

How is enterprise value (EV) calculated?

Answer: Market capitalization plus net debt (total debt minus cash)

EV represents the total value of a business to all capital providers (equity and debt holders), calculated as market cap + debt − cash and equivalents.

What is the Gordon Growth Model (Dividend Discount Model) used for?

Answer: Valuing a stock as the present value of perpetually growing dividends

The Gordon Growth Model values a stock as D1 / (r − g), where D1 is next year's dividend, r is the required return, and g is the constant dividend growth rate.

What is a comparable company analysis (comps) in equity valuation?

Answer: Valuing a company by applying valuation multiples derived from similar publicly traded peers

Comps analysis derives a valuation range by applying relevant multiples (EV/EBITDA, P/E) from comparable public companies to the target company's financial metrics.