building-equity-valuation-models

name	building-equity-valuation-models
description	Constructs DCF, comparable company, and precedent transaction valuation models with sensitivity analysis. Use when valuing public companies, building financial models, or estimating fair value ranges.
tags	["modeling","equity-research","valuation"]
metadata	{"author":"casemark","practice_areas":["Equity Research","Investment Management"],"document_types":["Model"],"skill_modes":["Modeling"]}

Building Equity Valuation Models

When To Use

• Estimating intrinsic or fair value of a public or private equity security
• Building or auditing a DCF, comparable company analysis (comps), or precedent transaction analysis
• Preparing valuation support for investment memos, pitch books, or fairness opinions
• Running sensitivity/scenario analysis around key value drivers
• Cross-checking a single-method valuation with a multi-method "football field" range

Inputs To Gather

• Company financials: Most recent 10-K/10-Q or annual report — revenue, EBITDA, EBIT, net income, capex, D&A, working capital line items (minimum 3 years historical)
• Forward estimates: Consensus sell-side estimates or management guidance for revenue and earnings (2–3 years forward)
• Capital structure: Total debt, cash & equivalents, diluted share count (including options/RSUs via treasury stock method), preferred equity, minority interests
• Comparable universe: 5–10 peer companies with sector, size, growth, and margin similarity; confirm tickers and fiscal year ends
• Precedent transactions: Relevant M&A deals in the sector over the trailing 3–5 years with disclosed deal multiples
• Discount rate inputs: Risk-free rate [VERIFY current yield on 10-year sovereign], equity risk premium, levered/unlevered beta source, cost of debt, target capital structure for WACC
• Terminal value assumptions: Long-term growth rate or exit multiple, and rationale for each

Workflow

1. Construct the DCF Model

• Project unlevered free cash flow (UFCF) for 5–10 years: Revenue → EBIT → NOPAT → add back D&A → subtract capex and changes in net working capital
• Calculate WACC: weight cost of equity (CAPM) and after-tax cost of debt by target capital structure [VERIFY tax rate assumptions per jurisdiction]
• Compute terminal value using both the perpetuity growth method (Gordon Growth) and the exit multiple method; present both
• Discount projected UFCF and terminal value to present; sum to get enterprise value
• Bridge to equity value: Enterprise Value − Net Debt − Minority Interests − Preferred + Associates/JV value → Equity Value ÷ Diluted Shares = Implied Price Per Share

2. Build Comparable Company Analysis

• Select peer set; document selection criteria (sector, geography, size, growth profile)
• Pull trailing and forward multiples: EV/Revenue, EV/EBITDA, EV/EBIT, P/E, P/FCF
• Calculate mean, median, and interquartile range; flag and discuss outliers
• Apply selected multiple range to subject company's corresponding metric to derive implied valuation range
• Adjust for company-specific premiums/discounts (growth differential, margin profile, risk factors)

3. Build Precedent Transaction Analysis

• Identify 8–15 comparable transactions; document deal date, buyer/seller, deal value, and strategic rationale
• Extract transaction multiples: EV/Revenue, EV/EBITDA at announcement and at LTM pre-deal
• Note control premiums paid (deal price vs. unaffected share price)
• Apply relevant multiple range to subject company metrics; clearly separate "as-is" value from "with-control-premium" value
• Flag stale transactions (>3 years old) and note market-environment differences [VERIFY macro conditions at deal close]

4. Sensitivity & Scenario Analysis

• DCF sensitivities: Build two-way data tables on (a) WACC vs. terminal growth rate and (b) WACC vs. exit multiple — display implied share price ranges
• Comps sensitivities: Show valuation at 25th, 50th, and 75th percentile multiples
• Scenario overlay: Define base, bull, and bear cases with explicit assumption changes (revenue growth, margin expansion/compression, multiple re-rating); summarize each scenario's implied value

5. Synthesize the Valuation Range

• Present a "football field" chart or table showing the implied price range from each methodology side by side
• Identify the central tendency across methods and highlight where methodologies converge or diverge
• State a recommended fair value range (not a point estimate) with confidence weighting by methodology

Output

Deliver a structured valuation model containing:

• Assumptions page: Every key input listed, sourced, and dated; [VERIFY] tags on any assumed or estimated inputs
• DCF tab: Full UFCF build, WACC calculation, terminal value (both methods), bridge to equity value
• Comps tab: Peer summary table with multiples, statistical summary, implied valuation
• Precedents tab: Transaction summary, multiple ranges, implied valuation
• Sensitivity tables: Two-way tables for DCF; percentile tables for comps/precedents
• Summary page: Football field visualization, fair value range, key risks to the valuation thesis
• All figures clearly labeled with units, currency, and fiscal period

Quality Checks

• Verify UFCF build ties back to source financials — check that Revenue → EBIT → NOPAT → UFCF reconciles
• Confirm WACC components are internally consistent (beta source matches peer set; debt cost matches credit profile)
• Ensure terminal value does not exceed 70–75% of total enterprise value; if it does, extend the explicit forecast period or revisit growth assumptions
• Validate that the equity bridge accounts for all claims ahead of common equity (convertibles, preferred, minority interests)
• Cross-check implied valuation multiples from DCF against comps range — significant divergence requires explanation
• Confirm diluted share count uses treasury stock method and reflects latest filing [VERIFY share count date]
• Review all [VERIFY] tags before finalizing; no unresolved tags in the delivered output