The full DCF machinery, applied.
Every McKinsey Part Two chapter (Ch5–12) plus Damodaran's 3M case. Build a complete DCF from scratch: FCFF/FCFE, WACC, terminal value, sensitivity analysis, multiples reconciliation, and the point where models become investment views.
Valuation: Measuring and Managing (McKinsey) + The Little Book of Valuation (Damodaran)
Three DCF variants — entity DCF, APV, and economic profit — and when each is the right tool. McKinsey on why they always produce the same answer when done correctly.
Free cash flow to the firm vs. free cash flow to equity: the difference matters for what discount rate you apply. How to calculate both from GAAP financials.
McKinsey's key insight: value is created only when ROIC exceeds the cost of capital. The key value driver formula — and why growth destroys value at low ROIC companies.
Before you can forecast, you need to understand what actually happened. How McKinsey reorganizes GAAP statements to separate operating performance from financing decisions.
Top-down and bottom-up revenue forecasting. How to anchor margin assumptions to historical performance and industry benchmarks without being overconfident.
How the balance sheet connects to the income statement forecasts. Working capital as a percentage of revenue, capex vs. depreciation, and the equity plug that makes everything balance.
Often more than 70% of a DCF comes from terminal value. Perpetuity growth vs. exit multiple — and why the choice of method matters less than the internal consistency of assumptions.
WACC from first principles: cost of equity via CAPM, after-tax cost of debt, market-value weights. The debt tax shield and why leverage changes the cost of capital.
How practitioners actually estimate WACC: beta from comparable companies, the equity risk premium debate, country risk premiums, and the five most common errors McKinsey sees.
The mechanics: discount FCFF to enterprise value, subtract net debt, divide by diluted shares. The model structure that makes errors visible before they corrupt the answer.
A single DCF output is almost certainly wrong. Sensitivity tables, scenario analysis, and Monte Carlo thinking: how to present a valuation as a range instead of a point.
Comparable company analysis in practice: how to select a peer group, why trading multiples and transaction multiples differ, and how to triangulate between them.
When your DCF says $80 and comps say $120, one of them is wrong — or the market has different expectations. Damodaran on how to investigate the gap productively.
Damodaran walks through a complete FCFF valuation of 3M using publicly available data. Every input justified, every assumption made explicit, final value compared to market price.
Fifteen questions: calculate FCFF from provided statements, estimate WACC from given inputs, build a one-period terminal value, and interpret a sensitivity table.