Financial Modeling & Valuation
Module 7: Capstone Project
Module Overview
This is where everything comes together. In this capstone project, you'll value a real company using all the methodologies you've learned—DCF, Trading Comps, Precedent Transactions, and LBO analysis. You'll reconcile the results, form an investment thesis, and present your recommendation.
This is the work that investment bankers, equity research analysts, and private equity professionals do every day.
Learning Objectives:
By the end of this module, you will be able to:
- Conduct comprehensive company analysis
- Apply all four valuation methodologies
- Reconcile differing valuation results
- Form a coherent investment thesis
- Present a professional investment recommendation
- Defend your assumptions and conclusions
Estimated Time: 8-10 hours
7.1 Project Overview
Your Assignment
You will value a publicly traded company using multiple methodologies and present an investment recommendation.
Deliverables:
- Executive Summary (1 page)
- Company Overview and Investment Thesis
- Historical Financial Analysis
- 3-Statement Projection Model
- DCF Valuation
- Trading Comparables Analysis
- Precedent Transactions Analysis
- LBO Analysis (Ability to Pay)
- Valuation Summary (Football Field)
- Investment Recommendation
Choosing Your Target Company
Select a publicly traded company that:
- Has 3+ years of public financial history
- Operates in an industry with comparable companies
- Has recent M&A activity for precedent transactions
- Is reasonably sized ($1B - $50B market cap works well)
- Is not in a regulated industry (banks, insurance, utilities)
Suggested Industries:
- Enterprise Software
- Consumer Discretionary
- Healthcare Services
- Industrial Manufacturing
- Media & Entertainment
7.2 Step 1: Company Overview
What to Include
Business Description:
- What does the company do?
- How does it make money? (revenue streams)
- What is the business model?
- Where does it operate? (geography)
Industry Context:
- Market size and growth
- Competitive dynamics
- Key industry trends
- Regulatory environment
Competitive Position:
- Market share
- Key competitors
- Competitive advantages (moat)
- Risks and challenges
Recent Developments:
- Last 1-2 years of material events
- Strategy changes
- M&A activity
- Management changes
Example Format
Company Overview: TechCorp Inc.
Business Description:
TechCorp is a leading provider of enterprise resource planning (ERP)
software to mid-market companies. The company generates ~80% of
revenue from recurring software subscriptions and ~20% from
professional services...
Key Financial Highlights (FY2024):
Revenue: $2.5B (15% YoY growth)
EBITDA: $625M (25% margin)
Free Cash Flow: $480M
Net Debt: $300M
Investment Thesis Summary:
- Strong competitive position in growing market
- High recurring revenue provides visibility
- Margin expansion opportunity through scale
- Potential M&A target for larger software players
7.3 Step 2: Historical Financial Analysis
Gathering Historical Data
Sources:
- 10-K annual reports (last 3 years)
- 10-Q quarterly reports (last 4 quarters)
- Earnings presentations
- SEC EDGAR (sec.gov/edgar)
Key Analyses
Income Statement Trends:
- Revenue growth trajectory
- Gross margin trends
- Operating leverage (margin expansion/contraction)
- Net income and EPS trends
Balance Sheet Analysis:
- Working capital efficiency
- Capital structure evolution
- Asset base and utilization
Cash Flow Patterns:
- Operating cash flow conversion
- CapEx requirements
- Free cash flow generation
- Uses of cash (dividends, buybacks, M&A)
Historical Summary Template
Historical Financial Summary ($M) 2022A 2023A 2024A CAGR
──────────────────────────────────────────────────────────────────────
Revenue 1,890 2,175 2,500 15.0%
YoY Growth % 15.1% 14.9%
Gross Profit 1,096 1,283 1,500
Gross Margin % 58.0% 59.0% 60.0%
EBITDA 434 522 625
EBITDA Margin % 23.0% 24.0% 25.0%
Net Income 265 325 390
Net Margin % 14.0% 15.0% 15.6%
Capital Expenditures (95) (109) (125)
% of Revenue 5.0% 5.0% 5.0%
Free Cash Flow 350 430 480
FCF Margin % 18.5% 19.8% 19.2%
──────────────────────────────────────────────────────────────────────
Key Observations:
1. Consistent 15% revenue growth over 2-year period
2. Margin expansion: EBITDA margin improved 200bps
3. Strong FCF conversion: ~75% of EBITDA converts to FCF
4. CapEx-light model supports cash generation
7.4 Step 3: 3-Statement Projections
Projection Framework
Build a 5-year projection model (Years 1-5) based on:
Revenue Drivers:
- Historical growth rates
- Industry growth expectations
- Company-specific initiatives
- Market share considerations
Margin Assumptions:
- Historical margins as baseline
- Scale benefits (or headwinds)
- Investment plans
- Competitive dynamics
Balance Sheet Drivers:
- Working capital days (DSO, DIO, DPO)
- CapEx requirements
- Debt repayment/issuance
- Dividend policy
Projection Template
Projection Assumptions 2025E 2026E 2027E 2028E 2029E
────────────────────────────────────────────────────────────────────────────
Revenue Growth % 12% 10% 9% 8% 7%
Gross Margin % 60.5% 61.0% 61.5% 62.0% 62.0%
EBITDA Margin % 25.5% 26.0% 26.5% 27.0% 27.0%
CapEx % of Revenue 5.0% 4.5% 4.5% 4.0% 4.0%
Days Sales Outstanding 45 45 44 44 43
Days Payables Outstanding 35 35 36 36 36
Tax Rate % 25% 25% 25% 25% 25%
Rationale for Key Assumptions:
- Revenue growth decelerates from 15% to 7% as company matures
- Margin expansion driven by operating leverage
- CapEx moderates as major investments complete
- Working capital efficiency improves slightly
Model Outputs
Your model should generate:
- Projected Income Statement
- Projected Balance Sheet
- Projected Cash Flow Statement
- Free Cash Flow for DCF
7.5 Step 4: DCF Valuation
Building the DCF
Using your projections, build a complete DCF:
Free Cash Flow Calculation:
FCFF = EBIT × (1 - Tax Rate) + D&A - CapEx - ΔNWC
WACC Determination:
- Cost of Equity (CAPM with company-specific beta)
- Cost of Debt (current yield or borrowing rate)
- Target capital structure weights
Terminal Value:
- Calculate using both methods
- Perpetuity Growth: Conservative long-term growth (2-3%)
- Exit Multiple: Based on trading comp multiples
Present Value:
- Discount FCFs at WACC
- Use mid-year convention
- Sum PV of FCFs + PV of Terminal Value
DCF Summary Template
DCF Valuation Summary
──────────────────────────────────────────────────────────────────────
WACC Calculation:
Risk-Free Rate: 4.0%
Beta: 1.10
Equity Risk Premium: 5.0%
Cost of Equity: 9.5%
After-Tax Cost of Debt: 4.5%
Debt Weight: 15%
Equity Weight: 85%
WACC: 8.8%
Terminal Value:
Method 1 - Perpetuity Growth (2.5%): $8,500M
Method 2 - Exit Multiple (10× EBITDA): $9,200M
Selected Terminal Value: $8,850M (average)
Enterprise Value:
PV of Projected FCFs: $1,850M
PV of Terminal Value: $5,750M
Enterprise Value: $7,600M
Equity Value:
Less: Net Debt ($300M)
Equity Value: $7,300M
Shares Outstanding: 200M
Implied Share Price: $36.50
Current Share Price: $34.00
Implied Upside: +7.4%
──────────────────────────────────────────────────────────────────────
7.6 Step 5: Trading Comparables
Peer Selection
Identify 6-10 comparable companies based on:
- Industry and business model
- Size (revenue, market cap)
- Growth profile
- Margin structure
- Geographic mix
Comps Analysis
For each peer, calculate:
- Enterprise Value
- LTM and NTM Revenue
- LTM and NTM EBITDA
- EV/Revenue multiples
- EV/EBITDA multiples
- P/E ratio
Trading Comps Template
Trading Comparables Analysis
As of [Date]
──────────────────────────────────────────────────────────────────────
Mkt EV/EBITDA EV/Rev
Company Ticker Cap($B) EV($B) LTM NTM LTM P/E
──────────────────────────────────────────────────────────────────────
SoftwarePeer1 SWPA $8.5 $9.2 14.5× 12.8× 4.2× 28.5×
SoftwarePeer2 SWPB $12.0 $13.5 16.2× 14.0× 5.1× 32.0×
SoftwarePeer3 SWPC $6.0 $6.8 12.0× 10.5× 3.5× 24.0×
SoftwarePeer4 SWPD $4.5 $5.0 11.5× 10.0× 3.0× 22.5×
SoftwarePeer5 SWPE $15.0 $16.2 18.0× 15.5× 6.0× 35.0×
SoftwarePeer6 SWPF $7.5 $8.0 13.5× 11.8× 4.0× 26.0×
──────────────────────────────────────────────────────────────────────
Mean 14.3× 12.4× 4.3× 28.0×
Median 14.0× 12.3× 4.1× 27.3×
──────────────────────────────────────────────────────────────────────
Applied to TechCorp:
LTM EBITDA: $625M
Median EV/EBITDA (NTM): 12.3×
NTM EBITDA Estimate: $710M
Implied EV: $8,733M
Implied Equity Value: $8,433M
Implied Share Price: $42.17
──────────────────────────────────────────────────────────────────────
7.7 Step 6: Precedent Transactions
Transaction Search
Find 5-10 relevant M&A transactions:
- Same or adjacent industry
- Last 3-5 years
- Similar size range
- Strategic and financial buyers
Precedent Analysis Template
Precedent Transactions Analysis
──────────────────────────────────────────────────────────────────────
Ann. LTM EV/ EV/
Acquirer / Target Date EV($M) EBITDA EBITDA Rev
──────────────────────────────────────────────────────────────────────
BigTech / SoftTarget1 Mar-24 $5,500 $380 14.5× 4.2×
StrategicCo / SoftTarget2 Nov-23 $3,200 $250 12.8× 3.8×
PE Fund / SoftTarget3 Aug-23 $2,800 $220 12.7× 3.5×
MegaSoft / SoftTarget4 Feb-23 $8,000 $550 14.5× 4.8×
IndustryBuyer / SoftTarget5 Sep-22 $4,200 $340 12.4× 4.0×
──────────────────────────────────────────────────────────────────────
Mean 13.4× 4.1×
Median 12.8× 4.0×
──────────────────────────────────────────────────────────────────────
Applied to TechCorp:
LTM EBITDA: $625M
Median Transaction EV/EBITDA: 12.8×
Implied EV: $8,000M
Implied Equity Value: $7,700M
Implied Share Price: $38.50
──────────────────────────────────────────────────────────────────────
Control Premium Analysis:
Average 1-Day Premium: 28%
Implied Premium in Transactions: Embedded in multiples
7.8 Step 7: LBO Analysis
LBO Framework
Determine what a financial buyer could pay:
Assumptions:
- Target IRR: 20%
- Hold Period: 5 years
- Leverage: 5.0× EBITDA
- Exit Multiple: 10× EBITDA (in line with entry)
LBO Ability to Pay
LBO Analysis - Ability to Pay
──────────────────────────────────────────────────────────────────────
Target IRR: 20%
Hold Period: 5 years
Entry EBITDA: $625M
Exit EBITDA (Year 5): $945M (projected)
Exit Multiple: 10.0×
Exit Enterprise Value: $9,450M
Capital Structure:
Total Debt (5.0× Entry EBITDA): $3,125M
Ending Debt (after paydown): $2,000M
Exit Equity Value: $7,450M
Required Entry Equity for 20% IRR:
Exit Equity / (1.20)^5 = $7,450M / 2.49 = $2,992M
Maximum Entry Valuation:
Entry Equity: $2,992M
Entry Debt: $3,125M
Maximum EV: $6,117M
Less: Fees/Expenses: ($120M)
Maximum Purchase Price: ~$6,000M
Implied Entry Multiple: $6,000M / $625M = 9.6× EBITDA
Implied Share Price: ($6,000M - $300M) / 200M = $28.50
LBO Floor Analysis:
At 9.6× entry, PE achieves 20% IRR
At current price ($34), PE IRR = ~14%
Current price is above LBO floor
──────────────────────────────────────────────────────────────────────
7.9 Step 8: Valuation Summary
The Football Field
Present all methodologies together:
Valuation Summary - TechCorp Inc.
Implied Share Price by Methodology
──────────────────────────────────────────────────────────────────────
Low Base High
DCF Analysis $32.00 $36.50 $42.00
Perpetuity Growth: 2.0%-3.0%
WACC: 8.3%-9.3%
Trading Comps $36.00 $42.00 $48.00
NTM EV/EBITDA: 10.0×-14.0×
Precedent Transactions $35.00 $38.50 $44.00
EV/EBITDA: 11.0×-14.0×
LBO Analysis (20% IRR floor) $26.00 $28.50 $32.00
Entry Multiple: 8.5×-10.0×
52-Week Trading Range $28.00 — $38.00
Analyst Price Targets $36.00 — $45.00
──────────────────────────────────────────────────────────────────────
Current Share Price: $34.00
──────────────────────────────────────────────────────────────────────
Reconciling the Values
Why do methodologies give different answers?
-
DCF vs. Trading Comps: DCF reflects your view of fundamentals; comps reflect market sentiment. Differences suggest the market may over/undervalue.
-
Trading Comps vs. Precedent Transactions: Transactions include control premiums. The gap represents what acquirers pay for control.
-
LBO Floor: Shows downside protection. If trading above LBO floor, PE interest provides support.
Your job: Weigh the methodologies appropriately based on:
- Quality of data available
- Relevance to the valuation context
- Confidence in your assumptions
7.10 Step 9: Investment Recommendation
Forming Your Thesis
Based on your analysis, answer:
-
Is the company a good business?
- Competitive position
- Growth potential
- Management quality
-
Is the stock attractively priced?
- Valuation vs. intrinsic value
- Valuation vs. peers
- Margin of safety
-
What are the key risks?
- Execution risks
- Industry risks
- Valuation risks
-
What is your recommendation?
- Buy / Hold / Sell
- Target price
- Investment horizon
Recommendation Format
Investment Recommendation: BUY
Target Price: $40.00
Current Price: $34.00
Implied Upside: +17.6%
Investment Horizon: 12-18 months
Investment Thesis:
TechCorp represents an attractive investment opportunity based on:
1. Strong Competitive Position
- Market leader in growing mid-market ERP space
- High switching costs create recurring revenue moat
- 85% revenue retention rate provides visibility
2. Underappreciated Margin Expansion
- Scale benefits should drive EBITDA margins from 25% to 27%+
- Cloud transition reduces support costs
- Operating leverage in sales model
3. Attractive Valuation
- Trading at 10.8× NTM EBITDA vs. peer median of 12.3×
- 12% discount despite similar growth profile
- DCF suggests 7%+ upside to intrinsic value
4. M&A Upside
- Strategic acquirers active in space
- Precedent transactions at 12-14× EBITDA
- Potential for 15-25% control premium
Key Risks:
- Competitive pressure from large vendors
- Slower-than-expected cloud migration
- Macro sensitivity in mid-market segment
Catalysts:
- Q2 earnings beat and raise (expected August)
- Potential strategic partnership announcement
- Continued margin improvement
Valuation Summary:
- DCF Fair Value: $36.50 (Base Case)
- Trading Comps: $42.00 (Median)
- Blended Target: $40.00
Recommendation: BUY with $40 target (12-18 month horizon)
7.11 Presentation Guidelines
Structure Your Presentation
Executive Summary (1 page)
- Company snapshot
- Investment recommendation
- Key valuation metrics
- Risk/reward summary
Company Overview (2-3 pages)
- Business description
- Industry analysis
- Competitive positioning
- Recent developments
Financial Analysis (2-3 pages)
- Historical performance
- Key driver analysis
- Projection assumptions
Valuation (4-5 pages)
- DCF (with sensitivity)
- Trading Comps
- Precedent Transactions
- LBO Analysis
- Football Field summary
Recommendation (1-2 pages)
- Investment thesis
- Key risks
- Catalysts
- Target price derivation
Best Practices
Be Clear and Concise:
- Lead with conclusions
- Support with evidence
- Avoid jargon overload
Show Your Work:
- Explain key assumptions
- Provide sensitivities
- Acknowledge uncertainties
Be Balanced:
- Present bull and bear cases
- Address obvious concerns
- Don't cherry-pick data
Make It Visual:
- Use charts and tables
- Football field is essential
- Sensitivity tables show range
7.12 Checklist for Completion
Pre-Submission Checklist
Company Analysis:
- Clear business description
- Industry context provided
- Competitive position assessed
- Recent developments noted
Financial Model:
- 3+ years of historical data
- 5-year projections
- Balance sheet balances
- Cash flow ties to balance sheet
- Assumptions documented
DCF:
- FCF calculated correctly
- WACC derived with sources
- Terminal value (both methods)
- Sensitivity analysis
- Bridge to share price
Trading Comps:
- 6+ comparable companies
- Enterprise values calculated
- Multiples computed
- Statistics (mean, median)
- Applied to target
Precedent Transactions:
- 5+ relevant transactions
- Transaction multiples calculated
- Statistics provided
- Applied to target
- Premiums analyzed
LBO:
- Sources and uses
- Operating projections
- Debt schedule
- Return calculations
- Sensitivity to entry/exit
Valuation Summary:
- Football field chart
- All methodologies compared
- Range vs. point estimate
- Current price marked
Recommendation:
- Clear Buy/Hold/Sell
- Target price stated
- Thesis articulated
- Risks addressed
- Catalysts identified
Summary
This capstone project brings together everything you've learned:
- Financial Statement Analysis → Understanding the business
- 3-Statement Modeling → Projecting the future
- DCF Valuation → Intrinsic value
- Trading Comps → Market value
- Precedent Transactions → M&A value
- LBO Analysis → Financial buyer value
By completing this project, you'll have demonstrated the full skill set of a financial analyst or investment banking associate.
Proceed to the Epilogue after completing your capstone project for concluding thoughts on your valuation journey.
"The goal is not to predict the future perfectly—it's to be less wrong than the market."
Good luck with your analysis!