# Discounted Cash Flow

Valuation

- Discounted Cash Flows
- Going Concern concept
- Dividend Discount Model (DDM)
- Gordon Growth Model
- Discounted Cash Flow Analysis (DCF)
- Free Cash Flow to Firm (FCFF)
- Free Cash Flow to Equity (FCFE)
- Terminal Value
- Cost of Equity
- CAPM Beta
- Calculate Beta Coefficient
- Market Risk Premium
- Risk Premium formula
- Weighted Average Cost of Capital (WACC)
- Security Market Line (SML)
- Systematic Risk vs Unsystematic risk
- Free Cash Flow (FCF)
- Free Cash Flow Yield (FCFY)
- Mistakes in DCF
- Treasury Stock Method
- CAPM Formula
- Cash Flow vs Free Cash Flow
- Business Risk vs Financial risk
- Business Risk
- Financial Risk

## WHAT IS Discounted Cash Flows Valuation?

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

### Dividend Discount Model (DDM)

Dividend Discount Model price is the intrinsic value of the stock. This is the foundation to DCF Valuation.

### Gordon Growth Model

The Gordon growth model is also known as DDM that is used to evaluate the intrinsic value of a stock

### Discounted Cash Flow Analysis (DCF)

Discounted Cash Flow Valuation is a process of evaluating the attractiveness of an investment opportunity in the future at present.

### Free Cash Flow to Firm (FCFF)

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)

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

Terminal value is the value of a firms that expect to the free cash flow beyond the period of explicit projected financial model.

### Cost of Equity

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.

### CAPM Beta

Capital Asset Pricing Model is used to calculate Cost of Equity.

### Calculate Beta Coefficient

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

Market risk premium is the additional rate of return over and above the risk-free rate.

### Risk Premium formula

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.

### Weighted Average Cost of Capital (WACC)

WACC analysis assumes that capital markets in any given industry require returns commensurate with perceived riskiness of their investments.

### Security Market Line (SML)

SML is the graphical representation of the Capital Asset Pricing Model.

### Systematic Risk vs Unsystematic risk

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.

### Free Cash Flow (FCF)

FCF is a measurement of a firms financial performance and health.

### Free Cash Flow Yield (FCFY)

FCFY can be computed from the equity shareholder perspective as well as a firm perspective.

### Mistakes in DCF

DCF Valuation analysis is a process of evaluate the attractiveness of an investment opportunity in the future at present.

### Treasury Stock Method

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

CAPM formula for finding out the required rate of return of a particular asset or stock.

### Cash Flow vs Free Cash Flow

Cash flow is much broader in concept, whereas FCF is computed by using earnings before interest and taxes EBIT.

### Business Risk vs Financial risk

Here we compare the Business risk with the Financial Risk.

### Business Risk

Business risk is the risk associated with running a business. The risk can be higher or lower time to time.

### Financial Risk

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.