DCF for Bank Valuation: Step-by-Step Guide with Real-Life Examples
Did you know that the financial industry makes up $8.81 trillion of the market cap of the stock market, which is 13% of the market, third-largest by market cap compared to tech and consumer discretionary. Most investors ignore or pass the financial industry by, largely because they don’t understand the industry or valuing those companies. […]
3 Simple Tips for Managing Interest Rate Risk in an Ever Changing World
Updated: 5/23/2023 For investors, basic interest rate risk management means that your portfolio should still earn a decent return even if interest rates were to trend in an unexpected direction. History can show us explicitly how interwoven interest rates and valuations (stock prices) have been; history also tells us that changing interest rates are the […]
Valuing Young Companies: A Complete Guide Using a DCF (FCFF) Model
Valuing a young company is one of the more difficult tasks in valuation. Trying to pin a value on a young company, startup, or idea business is difficult because of little or no revenues and large operating losses. Other challenges are the short financial histories of young companies, plus the dependence on outside capital to […]
Building a DCF Using the Unlevered Free Cash Flow Formula (FCFF)
“Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.” –Warren Buffett Cash is the lifeblood of all companies, and determining the fair value or intrinsic value is a matter of calculating what the cash flow of the future […]
Expect 4.6% Equity Returns According to the Grinold-Kroner Model
The Grinold-Kroner model can be used to estimate returns for a single stock, a sector, or the market in general and is a learning from CFA Level III on capital market expectations. Knowing the factors contributing to total expected returns in the Grinold-Kroner model can help investors understand what is driving their returns. In this […]
Using 65 Years of Statistics to Make an Intelligent Cash Flow Projection
In valuation, the name of the game is expected future cash flows. It’s not about the past, it’s about the future. So in trying to estimate the value of an asset, an intelligent cash flow projection is critical. And it’s rife with pitfalls. As we know, there’s a myriad of destructive biases and ideas that […]
How to Use Reinvestment Rate to Project Growth for Valuation
Updated 5/22/2023 “Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.” Warren Buffett, 1992 Berkshire Hathaway Shareholder Letter Finding companies that compound their returns on invested capital over long periods while growing simultaneously […]
REIT Cap Rate Formula with Real-Life Examples [STOR, ADC, NNN]
The REIT Cap Rate formula, along with Funds From Operations (FFO), are two critical REIT ratios to understand and implement when analyzing REIT (Real Estate Investment Trust) stocks. REITs require special ratios, of course, because of the unique features and structure of their business models. In contrast to more traditional corporations, REITs derive their revenues […]
Walking Through a Valuation Including Share Based Compensation
Today, one of the more controversial finance topics is share-based compensation or stock options issued to employees, particularly the C-suite managers. Because of incentives tied to those options, recently, there have been some not-so- shareholder-friendly behaviors. Those behaviors have led many in Congress to believe that this type of compensation is undesirable for both investors […]
Making a 3-Variable DCF Sensitivity Analysis in Excel
A DCF sensitivity analysis is a fantastic way to estimate valuation on a company because it gives you a range of intrinsic values instead of just one steady state number. DCFs inherently rely on future assumptions, and we can’t be precise on these (because the future is unknown), so it’s better to estimate them with […]
