Valuation assignments reward transparency more than sophistication. A simple model whose assumptions are visible and justified scores better than an elaborate one whose numbers cannot be traced. Markers are assessing your judgement about inputs, not your ability to nest functions.
Structure the Workbook Before You Build It
Use separate, clearly labelled sheets:
- Assumptions — every input, in one place, colour-coded as hardcoded.
- Historical financials — three to five years, as reported.
- Forecast — driven entirely by formulas referencing Assumptions.
- Valuation — DCF, terminal value, bridge to equity value.
- Sensitivity — data tables and scenarios.
The rule that matters: no hardcoded number anywhere except the Assumptions sheet. If a marker cannot change the growth rate in one cell and watch the valuation move, the model is not auditable.
Forecast the Drivers, Not the Totals
Do not forecast revenue as "grows 8% a year" without saying why. Decompose it: volume × price, or customers × average revenue per customer, or stores × sales per store. Then forecast each driver with a rationale tied to evidence — market growth data, capacity constraints, historical trend, management guidance.
Do the same for costs. Split fixed and variable, and let variable costs flow from the revenue driver rather than a flat percentage assumption you never justify.
Free Cash Flow, Correctly Defined
For an enterprise DCF:
FCFF = EBIT × (1 − tax rate) + Depreciation & Amortisation − Capital Expenditure − Increase in Net Working Capital
Two frequent errors: forgetting that D&A is added back because it is non-cash, and ignoring working capital entirely. A growing business consumes cash through working capital, and omitting it systematically overstates value.
WACC: Show Your Working
WACC = (E/V × Re) + (D/V × Rd × (1 − t)). Build the cost of equity via CAPM: risk-free rate plus beta times equity risk premium. State the source for each: which government bond for the risk-free rate, where the beta comes from and whether you have relevered it, which premium estimate and why. Small changes here move the valuation a great deal, which is precisely why markers examine it.
Terminal Value Is Most of Your Answer
Terminal value typically accounts for 60–80% of a DCF valuation, so it deserves proportionate care. Using Gordon Growth, the perpetuity growth rate must be modest — no company grows faster than the economy forever, so a rate above long-run nominal GDP growth is indefensible. Cross-check with an exit multiple approach and comment on any divergence.
Sensitivity Analysis Is Not Optional
Present a two-way data table of enterprise value across WACC and terminal growth. Then run three scenarios — base, downside, upside — changing the operating drivers rather than only the discount rate. Conclude with a valuation range and state which assumption the valuation is most sensitive to. A single point estimate presented with false precision reads as naive.
Writing It Up
The report is not the model. Explain the assumption logic in prose, present the key outputs as tables in the body, and put the full model in an appendix. Include a short section on limitations: data quality, forecast horizon uncertainty, and what you would examine with more access.