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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.
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
Dividend Discount Model price is the intrinsic value of the stock. This is the foundation to DCF Valuation.
The Gordon growth model is also known as DDM that is used to evaluate the intrinsic value of a stock
Discounted Cash Flow Valuation is a process of evaluating the attractiveness of an investment opportunity in the future at present.
FCFF is one of the most important concepts of Discounted Cash Flow Valuation. It means finding the free cash flow available to the firm before the any debt related interest payments.
Free Cash Flow to Equity (FCFE) measures how much “cash” a firm can return to its shareholders and is calculated after taking care of the taxes, capital expenditure and debt cash flows.
Terminal value is the value of a firms that expect to the free cash flow beyond the period of explicit projected financial model.
Must know for DCF Valutaion. Cost of Equity is one of the most significant attributes that you need to look at before you think of invest in the company’s shares.
Capital Asset Pricing Model is used to calculate Cost of Equity.
Beta Coefficient is a financial metric that measure price of a stock will change in relation to the movement in the market price.
Market risk premium is the additional rate of return over and above the risk-free rate.
This is an improtant part of Discounted Cash FlowValuation. Risk premium formula is calculated by subtracting the return on risk-free investment from the return on an investment.
WACC analysis assumes that capital markets in any given industry require returns commensurate with perceived riskiness of their investments.
SML is the graphical representation of the Capital Asset Pricing Model.
Systematic risk is the probability of a loss associated with the entire market or the segment whereas Unsystematic risk is associated with a specific industry, segment or security.
FCF is a measurement of a firms financial performance and health.
FCFY can be computed from the equity shareholder perspective as well as a firm perspective.
DCF Valuation analysis is a process of evaluate the attractiveness of an investment opportunity in the future at present.
Treasury Stock Method is where we assume that all in the money options and warrants are exercised and dilute the total number of shares
CAPM formula for finding out the required rate of return of a particular asset or stock.
Cash flow is much broader in concept, whereas FCF is computed by using earnings before interest and taxes EBIT.
Here we compare the Business risk with the Financial Risk.
Business risk is the risk associated with running a business. The risk can be higher or lower time to time.
Financial risk is the inability of the firm to not being able to pay off the debt it has taken from the bank or the financial institution.
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