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Subject:  Re: Discounted Cash Flow Model - Negative FCF Date:  2/8/2011  1:31 PM
Author:  TMFValuemoosie Number:  1634 of 1675

Hi Jared,

Jack gave you some great answers. I'd just like to add that forecasting working capital, and especially capex are still difficult, but critical, even in stable companies. So you might want to practice trying to model a more mature firm in your desired industry. Not just to get a feel for what your start up might do, as Jack suggests, but to understand the effects changes in these assumptions can have even on companies that are simpler to forecast.

Cap Ex has always been the crux of my DCF efforts. It's where I end up applying most of the logic, and it's the most prone to skewing the forecast. Mine is a work in progress...

Handling capex properly in your model reveals how a decent company can still be a horrible stock, if the industry economics require that they continually pump cash back into the business. There are models that look mostly at Operating Cash Flow, but that's like looking at your salary, without factoring in required large expenditures like cars and houses.

I know you didn't ask, but:
One of my two favorite investing finance books is Investment Valuation, by Aswath Damodaran, the author of those spreadsheets. I recommend getting a copy.
He is a professor at Stern School of Business, and offers video of his classes free online. (My other favorite is also a valuation book: )

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