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Hi Jared,

I highly recommend building your own model. For me, the model is useful as a tool, but I learned much more creating it from scratch than I ever would have using Dam's sheets. My copy of Valuation is dog-eared, but I've never used Dam's spreadsheets, except occasionally to try and resolve something I don't understand about the calculations.

1. Estimating Cap Ex in the future. Should I be using current WC as function of Revenues for future cap ex or should I provide an estimate. Not real comfortable with what this number should be or how I determine a reasonable one.

2. Operating Margin. What I ended up doing was using an average operating margin for 6 companies. Again I don't know enough about companies to know what is reasonable

3. Debt to Capital Ratio. Absolutely clueless what I should use for stable growth. The number has a large impact on the valuation. Currently using 36.3% based on my estimate for the current period.

You've correctly identified the hard parts :)

1. I use Dam's industry average Marginal-Sales-to-Capital as a guideline. Then I assume (pretend) that there is a direct correlation of revenue to capital required (growth ain't free). Say MS/C is 3.0, then if I forecast revenue growing from $200m to $240, then the cap-ex required to do so is (240-200)/3.0 = $13.33m.

Along with Dam's average MS/C, I also calculate actual historical MS/C for this company, and actual historical revenue to beginning of period unadjusted invested capital. Unadjusted meaning no adjustments for operating leases, capitalized R&D, etc. I eyeball all these stats to decide on (swag) a reasonable MS/C for the forecast.

2. Similar to #1. I eyeball Dam's industry average EBIT Margin, as well as actual historical EBIT Margin for this company. If you want to include specific peer data, that's good, just make sure they're comparable. Different industries' margins vary wildly.

3. Might depend on the nature of the business. Compare to several mature peers. Try to get a sense of how management views debt - do they have any? Is it all revolving short term? Do they issue debt to buy back shares? Etc.

My model allows for separate inputs for all variables for each year in the (10 year) forecast, as well as terminal. It can be useful to model debt moving steadily from current state to some stable level (your 36% isn't a bad guess, depending on the industry).

I think I've said this before. Once I go to all the trouble of building a model from scratch, and then painstakingly developing a forecast, two things become apparent:

1. I have a reasonable understanding of how business in general, and this company, work.

2. I realize there are oh-so-many fiddly bits that greatly affect the estimate of value.

Realizing that I'm apt to be very wrong on at least one of the critical guesses, and that if I could tell the future I'd be surfing the coast of my own private island ....

.... I put down the spreadsheet and pick up Jack's chalk and axe. And put on a blindfold.

The process is absolutely critical, the results aren't. That said, the spreadsheet is also useful to track the company over time, as previously forecasted values become actuals.

Really, you seem very much on the right track here, as you had to have answered a whole slew of questions to have ended up with these three remaining areas of doubt.

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