Course Content

Mastering Discounted Cash Flow Analysis with Excel

1. Introduction to Business Valuation

What You'll Learn About DCF and Business Valuation Why Valuing a Business Matters for Investors and Owners Overview of Business Valuation Methods

2. Understanding Discounted Cash Flow (DCF) Analysis

Introduction to the Discounted Cash Flow Valuation Method DCF Money Printing Machine Example DCF Formula Calculations

3. Cash Flow Forecasting and Discount Rate Fundamentals

How to Calculate Unlevered Free Cash Flow (UFCF)Understanding the Discount Rate in Valuation How to Calculate Cost of Debt Cost of Debt Calculation Example How to Calculate Cost of Equity (CAPM)How to Calculate Cost of Equity Using Build Up Method Cost of Equity Calculation Example

4. WACC, Terminal Value & Sensitivity Analysis

Weighted Average Cost of Capital (WACC) Calculation Terminal Value (TV) and Perpetuity Growth Rate (g)Terminal Value Calculation Example Sensitivity Analysis in DCF Valuation

5. Building a DCF Valuation Model in Excel

Company Overview and Valuation Objective Exploring the Excel-Based DCF Model Modeling the Income Statement Items Modeling the Balance Sheet Items Creating Clean Income Statement Output Creating Clean Balance Sheet Output Building the UFCF Model: From EBIT to Operating Cash Flow Accounting for CapEx, Assets & Reconciliation to Net Cash Flow Forecasting UFCF and Linking Cash Flow to the Balance Sheet Final DCF Calculation and Valuation Output Visualizing Results with Excel Charts Performing Sensitivity Analysis in Excel

6. Practical DCF Case Study – Company Valuation in Action

DCF Assignment Walkthrough: From Inputs to Enterprise Value

How to Calculate Cost of Equity Using Build Up Method

While CAPM is the go-to model for calculating the cost of equity in public markets, it relies heavily on data like beta and market return—which aren't always available for private companies.

Enter the Build-Up Method: a practical, additive approach to estimate required return when traditional inputs are missing or unreliable.

The Build-Up Method adds layers of risk premiums to a base rate (usually the risk-free rate or a long-term bond yield) to reflect various types of investment risk.

Typical Formula

$\text{Cost of Equity} = R_f + \text{Equity Risk Premium} + \text{Size Premium} + \text{Industry Risk Premium} + \text{Company-Specific Premium}$

Formula Components

Risk-Free Rate ( $R_f$ ): baseline return for a riskless investment, e.g., a 10-year Treasury bond;
Equity Risk Premium: compensation for investing in equities over risk-free assets;
Size Premium: additional return demanded by investors for holding smaller companies, which tend to be riskier;
Industry Risk Premium: adjusts for volatility and cyclicality in specific sectors;
Company-Specific Premium: custom adjustment for non-systematic risks like management quality, client concentration, or governance.

When to Use It

Valuing private businesses with no beta or trading data;
When comparables are unreliable or inconsistent;
In early-stage startup valuation or low-liquidity contexts.

The Build-Up Method helps bridge the gap where data is scarce. It's not as elegant or theoretically grounded as CAPM, but it's practical, flexible, and widely used in private equity, valuation firms, and financial consulting.

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Section 3. Chapter 6

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