Investment Banking For Dummies, 2nd Edition

Chapter 20

Ten Ways to Improve a Discounted Cash Flow Analysis

IN THIS CHAPTER

Finding ways to improve estimates of cash flows and weighted average cost of capital

Looking at estimates from the client’s perspective

Identifying which assumptions of financial models are most important

Investment bankers spend a great deal of time constructing financial models on spreadsheets and manipulating them to arrive at values for companies, divisions, and potential projects. These models are often very complex and involve many assumptions and inputs. This chapter provides some ideas on how investment bankers can improve their analyses and deliver greater value to clients.

Financial Analysis Isn’t Physics

In many disciplines mathematical calculations need to be carried out to several significant digits and the results applied to complex processes. For instance, when NASA is launching rockets to “infinity and beyond,” calculations involving satellite orbits and descent angles need to be exact. Minor mistakes can be disastrous and result in aborted missions and losses of millions of dollars. Likewise, when engineers are building bridges and buildings, the calculations need to be quite precise. ...