DCF Valuation

Simplified for your

Finance Job
Interview

Het Parekh
 01

Project future
cash flows
Apple's free cash flow (FCF) in 2023
is expected to be $111 billion. We'll
assume that Apple's FCF will grow
at a constant rate of 4% per year
for the next 10 years. This means
that Apple's FCF in 2033 will be $111
billion * (1 + 4%)^10 = $164 billion.

Het Parekh
 02

Choose a discount
rate
A common discount rate for valuing
technology companies is the weighted
average cost of capital (WACC). Apple's
WACC is about 8%.

Het Parekh
 03

Calculate the
terminal value
Terminal Value = FCF* (1 + Growth Rate)/
(Discount Rate - Growth Rate)
= $164 billion * (1 + 4%) / (8% - 4%)
= $4264 billion

Het Parekh
 04

Discount the cash

flows and terminal
value.
The intrinsic value of Apple is
$4264 billion / (1 + 8%)^10 =
$1,975 billion.

Het Parekh
 05

What we derive
This means that Apple is currently
trading at a premium to its intrinsic
value. This could be because investors
are expecting the company to grow
faster than 4% per year in the future.
Or, it could be because investors are
simply bullish on the company's long-
term prospects.

Het Parekh
As of July 28, 2023, Apple's current market
capitalization is $2.9 trillion. This is
significantly higher than the intrinsic value
of $1.975 trillion that we calculated using
DCF valuation.

This suggests that investors are expecting

Apple to grow faster than 4% per year in
the future. Or, it could be because
investors are simply bullish on the
company's long-term prospects.

Het Parekh
 It is important to note that the
intrinsic value of a company is just
one factor to consider when making
an investment decision.

Other factors, such as the

company's management team, its
competitive landscape, and its
industry outlook, should also be
considered.
Het Parekh
 Some other tips to answer
questions on DCF valuation in a
Job Interview

1. Be able to explain the assumptions you

make in your DCF valuation and why you
made them.
2. Be aware of the limitations of DCF
valuation and how they can impact your
results.
3. Be able to discuss how DCF valuation can
be used to make investment decisions.
4. Practice answering DCF valuation
questions.
5. Be confident in your answers and be clear
and concise.
6. Be open to feedback and be willing to
adjust your answers accordingly.

Het Parekh
Follow me on LinkedIn for
insights on DCF valuation
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