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How do the DCF parameters impact my valuation?
How do the DCF parameters impact my valuation?

Valuation | Parameters | DCF

Muiread Heffernan avatar
Written by Muiread Heffernan
Updated over a week ago

The discounted cash flow estimates the value of an investment using its expected future cash flows. Cyndx allows you to adjust the parameters in the DCF method accordingly.

Amortization expense continues in perpetuity?

Toggling amortization expense to continue in perpetuity results in an assumption in the terminal cash flow calculation that incremental capitalized development costs are required to replace the amortized intangible assets. The ratio of capitalized development costs to amortization depends on the assumed average useful life of amortizable intangibles and the perpetuity growth rate of the company.

It is generally appropriate to assume that amortization expense continues in perpetuity and capital outlays are required to sustain intangible assets if the amortization expense arises from capitalized development costs or ongoing acquisitions of intellectual property. If the amortization expense in the projection period instead arises from a one-time acquisition, it may be appropriate to turn off this option.

Apply mid-year discounting convention?

Toggling mid-year discounting triggers the assumption that cash flows on average occur in the middle of a period in the projection (generally a given calendar year) rather than at the end. Mid-year discounting is used when cashflows are spread fairly evenly throughout the year. End of year discounting may be more appropriate for companies that are growing very rapidly where.

Estimated average useful life of PP&E

The average useful life of PP&E dictates the ratio of capital expenditures incurred in the terminal cash flow calculation relative to terminal depreciation. The shorter the useful life, the more cash outflows are required to fund capital expenditures relative to depreciation. An estimate is required to produce a normalized terminal cash flow.

Estimated average useful life of amortizable intangibles

The average useful life of amortizable intangibles dictates the ratio of capitalized development costs incurred in the terminal cash flow calculation relative to terminal amortization. It only impacts the valuation if amortization expense is assumed to occur in perpetuity. The shorter the useful life, the more cash outflows are required to fund capitalized development costs relative to the amount of amortization. An estimate is required to produce a normalized terminal cash flow when economic amortization is expected to be ongoing.

Marginal effective tax rate

The marginal effective tax rate entered in the DCF assumptions impacts the calculation of after-tax cost of debt and levered beta in the WACC calculation. For companies with zero or negative net debt, this has no impact on the valuation. For companies with positive net debt, a higher marginal tax rate implies a lower weighted average cost of capital.


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