Every term used across the Valuation & DCF and CAPM & WACC guides, defined in plain English — look one up, or read the full guide it comes from.
B
Beta (β)
A measure of how much a stock tends to move for every 1% move in the broader market. β = 1.0 moves in line with the market; β > 1.0 amplifies market moves; β < 1.0 dampens them. It's the risk input at the center of CAPM.
The smoothed, year-over-year growth rate that would take a starting value to an ending value over a given number of years, expressed as a single annual percentage.
Cash spent on physical assets — equipment, facilities, infrastructure — needed to keep a business running and growing. It's subtracted when calculating free cash flow.
The standard formula for estimating cost of equity: the risk-free rate, plus a stock's beta multiplied by the equity risk premium. It answers what return an investor should demand given a stock's risk relative to the market.
The mix of debt and equity a company uses to fund itself. It determines the weights used in a WACC calculation, and it's what "unlevering" and "relevering" a beta adjusts for.
What it costs a company to borrow — roughly the interest rate it pays lenders. The after-tax version (which accounts for the tax deductibility of interest) is what belongs in a WACC calculation.
The return shareholders require to justify owning a business, given its risk. Unlike interest on debt, it never appears as a line item — CAPM is the standard way to estimate it.
A valuation method that projects a business's future free cash flow, then discounts it back to today's dollars using a discount rate (WACC) to arrive at a present value for the company.
A company's total debt divided by its equity value — a measure of how leveraged it is. Used to unlever and relever beta so it can be compared fairly across companies with different capital structures.
A company's operating profit — what it earns from its core business before financing costs (interest) and taxes are subtracted. The starting point for calculating free cash flow.
EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization)
A rough proxy for the cash a business's core operations generate, before financing and accounting decisions are layered on top. Commonly used as the base for an exit-multiple terminal value calculation.
A durable competitive advantage — network effects, switching costs, regulatory exclusivity, cost advantages — that lets a company sustain returns above its cost of capital for longer than competition would normally allow.
The value of an entire business — debt and equity combined. A standard DCF's output is enterprise value; subtract net debt to get to the value of the equity alone (what "market cap" represents).
The extra return investors historically demand for holding stocks instead of risk-free bonds — generally 4.5–6%. It's the second term in the CAPM formula, scaled up or down by beta.
A way of calculating terminal value by applying a market-based multiple (often EV/EBITDA) to a company's final projected year, grounding the estimate in what similar businesses actually trade for.
An extension of CAPM that adds a size factor and a value factor on top of market beta, built because single-factor CAPM systematically underpriced small and "cheap" stocks relative to their actual historical returns.
The real, spendable cash left over each year after a business pays for everything it needs to keep running. The only cash a DCF is allowed to work with — not revenue, not net income.
A way of calculating terminal value by assuming a business grows at a modest, sustainable rate forever after the forecast window — typically 2–3%, roughly long-run economic growth.
The tendency of a stock's price to drift back toward its moving average over time. Has a fundamental basis in ROIC gravitating toward WACC as competition erodes excess returns — unless a genuine economic moat prevents it.
Cash tied up in day-to-day operations — inventory, receivables, and similar short-term items. The change in this figure (Δ Net Working Capital) is subtracted when calculating free cash flow.
The framework behind a reverse DCF: start with a stock's current price and solve backward for the growth and margin assumptions that must be true to justify it, popularized by Michael Mauboussin and Alfred Rappaport.
A DCF run backward: instead of projecting cash flows to get a price, you start with today's market price and solve for the growth and margin assumptions the market must be pricing in — then test whether they're realistic.
Net income divided by shareholder equity — a common profitability metric. Only meaningful when compared against the cost of equity; a high ROE can still be value-destructive if it doesn't clear that bar.
A measure of how much profit a company generates for every dollar of capital invested in the business. When ROIC falls below WACC, growth actively destroys shareholder value rather than creating it.
A grid showing how a DCF's output changes as its most consequential assumptions — usually the discount rate and terminal growth rate — move together, used instead of publishing a single price target.
An additional return (typically 1–3%) added on top of a CAPM estimate for small or thinly-traded companies, since small-cap equity has historically earned more than beta alone predicts.
The single lump-sum number a DCF uses to represent all cash flow beyond its explicit forecast window — usually 60–80% of a DCF's total value, calculated via the Gordon Growth or Exit Multiple method.
Stripping out the effect of a company's specific debt load from its beta, to isolate the "pure" business risk underneath — done using the Hamada equation, before comparing beta across peers or applying it elsewhere.
The blended discount rate a DCF uses to translate future cash into today's dollars — cost of equity and after-tax cost of debt, weighted by how much of the company's funding comes from each source.
