Discounted cash flow

So let's say there's a 60% chance of approval.

Both the option value and your DCF value would have to be adjusted for that 60% chance of approval.

Let's close today by just bringing this all together.

So let's say I ask you to value a pharmaceutical company.

Investment banks price IPOs because they have to take these companies public at that price.

And if you look at a company like Twitter, I don't care what the DCF value is.

And that's why when the offering price was set at 26 and I got called saying, well, what do you think about bankers doing? They have a very different job than I do.

I was valuing the company.

Private company valuations, where the transitions are going to happen, those transitions will be worth, as you go through those transitions, if you look at two companies, one of which you expect to make transitions to VC and public, the company that makes the transitions will be worth more than a company that you don't expect to make the transitions.

I know some of you are valuing private businesses.

And when you turn the initial DCF, I allowed you to use a public company cost of capital.

You might want to go back and finesse that a little bit.

You're saying, what is that even going to mean? Let me start out with a couple of start of the class questions as to see where this is going to take us.

So in a DCF valuation, you take expected cash flows, you discount them back at a consolidated cost of capital, you come up with the present value, you get the value of the business.

In asset-based valuation, you value the pieces of the business.

So let me make this very specific.

I could take Disney, project out the cash flows for Disney as a company, discount back at Disney's cost of capital, and value Disney, which is the way I've approached DCF so far.

Here's the other way I could value Disney.

I could value ESPN separately.

I'll give you the cynical answer first.

Second, if you take the next three variables, capex minus depreciation plus change in working capital.

If I take capex minus depreciation plus change in working capital, when I did DCF valuation, when I take those three items and I put them together, what do I come up with? Capex minus depreciation plus change in working capital.

It's my reinvestment, right? It's how I get from EBIT times 1 minus T to free cash flow to the firm.

Other things remaining equal, the more you have to reinvest as a company to get your given growth rate, the lower your EBITDA EBITDA is going to be.

I mean, it looks like we're flying through.

It's because we're using the same process over and over again.

We're going back to DCF model, doing some algebra.

So I'm going to close off my discussion of multiples by talking about revenue multiples.