How can margin expansions enhance DCF projections?

Margin expansions enhance DCF projections primarily by increasing projected free cash flows. When margins expand, it typically means that a company is generating more profit per dollar of revenue. This increase in profits translates to higher free cash flows, which are critical components in DCF analysis.

In a DCF model, projected free cash flows are discounted back to their present value to arrive at the intrinsic value of a company. If a company successfully expands its margins—whether through cost reductions, pricing power, or operational efficiencies—its free cash flows will be higher than originally forecasted. As a result, the net present value of these cash flows increases, leading to a higher valuation of the firm.

While minimizing operational expenses can contribute to improved margins, the key aspect of the correct answer is the direct relationship between margin expansion and the increase in projected free cash flows, which ultimately drives the valuation in a DCF model. Reducing total liabilities and decreasing overall revenue are not relevant in the context of margin expansion enhancing projections, as these factors do not directly relate to the profitability and cash generation capacity of the business.