Key Concepts
Free Cash Flow (FCF)Cash generated by operations after capital expenditures. Unlevered FCF = EBIT(1−t) + D&A − CapEx − ΔNWC.
WACCWeighted Average Cost of Capital = (E/V)×Re + (D/V)×Rd×(1−t). Blends cost of equity and after-tax cost of debt.
Terminal ValueValue of all future cash flows beyond the projection period. Computed via Gordon Growth or Exit Multiple method.
Gordon Growth ModelTerminal Value = FCFₙ₊₁ / (WACC − g). Assumes perpetual growth at rate g.
Mid-Year ConventionDiscounts cash flows as if received mid-year rather than year-end. Adds ~3–5% to present value.
Cost of Equity (CAPM)Re = Rf + β×(Rm − Rf). Risk-free rate plus equity risk premium scaled by beta.
BetaMeasures stock's sensitivity to market movements. β > 1 means more volatile than market.
Equity Risk PremiumExcess return investors demand for holding equities over risk-free assets. Typically 4–6% in developed markets.