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Common errors in a DCF model

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DCF is not the most appropriate valuation methodology A DCF is an intrinsic valuation methodology that can be used to value most companies. However, there are a few notable exceptions where a DCF is not the most appropriate method in the sense that you won’t be able to derive a meaningful valuation. Firstly, it is not appropriate for companies with very unstable or unpredictable cash flows (or none at all) such as start-ups. Secondly, it is also not appropriate for companies where debt and working capital serve fundamentally different roles than traditional companies. For example, banks and financial institutions do not re-invest debt into the business (but rather use it to create financial products), interest is critical to a bank’s business model and working capital takes up a huge part of their balance sheet. Further, CapEx does not correspond to re-investment into the bank and is often negligible. For financial institutions, it’s more common to use a DDM for valuation purposes.  In
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COVID-19 and material adverse change clauses

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As COVID-19 infections continue to spread, companies continue to suffer cash and liquidity constraints as a result of temporary business closures and diminished consumer demand. As a result, parties to a contract may seek to invoke the material adverse change clause (MAC) to terminate or renegotiate contracts. This article aims to shed light on the MAC provision in the context of M&A and project financing and whether the pandemic qualifies as a material adverse event. What is a MAC / MAE? A material adverse change (MAC) or material adverse event (MAE) is a clause commonly found in acquisition and project financing agreements that give the buyer (in M&A deals) or lender (in financing deals) the right to terminate the contract or a basis to renegotiate the transaction, due to adverse business or economic developments occurring between the signing and closing of the agreement. MAC provisions typically acknowledge that business impacts attributable to a general economic downt
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Will AI takeover finance?

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I conducted extensive research into this controversial debate with an unbiased view as I truly wanted to learn more about the impacts of AI on the finance industry and how it can be leveraged for business success. Also, I wanted to know whether I could still break into the industry without it being stolen by a robot. Artificial intelligence (AI) is intelligence demonstrated by a machine that follows instructions known as algorithms, developed by an alleged species called programmers. They have made so much headway that some even have nationalities and passports. In 2017, Sophia, the lifelike robot developed by Hanson Robotics gained citizenship of Saudi Arabia! Many say that AI will take over the finance industry. But what does “takeover” mean? If we assume it’s the extent to which finance jobs are automated, how many need to be replaced before we finally acknowledge that it’s a takeover? I am in no position to make that call. However, I can give you my thoughts on the issue, and you c
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