Discounted Cash Flow Valuation is the most important valuation tool used by Financial Analysts. The primary idea revolves around finding the Free Cash flow of the firm and discounted it to find the fair value.
In this section, you will learn the Discounted Cash flow valuation comprehensively.
Technically, DCF Valuation is done by understanding the company fundamentals first, and then projecting the financials of the company by preparing a financial model. Once you have calculated FCFF from the projected model, you discount the free cash flows with an appropriate discount rate to find the fair value of the total firm (Enterprise Value). Thereafter, the fair Equity Value of the firm is found by deducting the debt.
We start with the Dividend discount model (also called the Gordon growth model) and learn the fundamentals of valuing a firm using dividends as cash flows.
Thereafter, we learn the tools of Free Cash Flow to firm and Free cash flow to Equity and the approach to find terminal value.
DCF valuation is incomplete with the knowledge of CAPM - capital asset pricing model used to calculate the cost of equity. Here, we also learn to calculate Beta coefficient, Market risk premium, weighted average cost of capital and free cash flow yield.
Going Concern Concept
Going concern concept means the ability of a Business to ‘run profitable’ for an indefinite period of time until the concern is stopped due to bankruptcy and its assets were gone for liquidation