Lesson 11 of 11 · All lessons in this module
  1. Disaggregated models: why and how to build a forecast valuation model
  2. Forecasting revenue: top-down, bottom-up and non-recurring items
  3. Forecasting operating costs: COGS, SG&A and segment margins
  4. Expense models: regressions, itemized costs and margin assumptions
  5. Working capital, capital investments and capital structure
  6. Asset and financing models: investment, financing needs and FCFE
  7. Integrated cases: a regional revenue build and richer financing assumptions
  8. Scenario analysis: risk factors, cost structure and sensitivityVideo lesson
  9. Matching the model to the company: life cycle, distress and control
  10. From forecast statements to equity value: FCFF, terminal value and scenarios
  11. Integrated case: from assumptions to equity value, step by step

This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.

Lesson 11 of 11 · 18 min

Integrated case: from assumptions to equity value, step by step

A forecast model turns a short list of assumptions into statements, then into free cash flow, a terminal value and an equity value; reading forecast FCFF against history shows where the value comes from.

In short

  • Work in order: income statement → balance sheet (cash as the plug) → NOPAT and net investment → FCFF → terminal value → present value → less debt.
  • Net investment = Δ net PP&E + Δ intangibles + Δ net working capital; FCFF = NOPAT − net investment.
  • Compare forecast FCFF with history: heavy early investment and margins that recover later give low early and high late FCFF.
  • Choose FCFF when the financing assumptions (flat debt, zero dividends, piling cash) make FCFE unreliable.
  • The terminal growth rate comes from the model: (1 − FCFF/NOPAT) × NOPAT / opening capital; sanity-check the result against an implied multiple.

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