A Comprehensive Guide to Discounted Cash Flow Models

📈Discounted cash flow models estimate the present value of assets based on future cash flows.

💰Free cash flows represent the cash available to both debt and equity holders after expenses.

🔢The forecasted free cash flows typically span 5-10 years based on assumptions and historical data.

💼Weighted average cost of capital (WACC) is the discount rate used to bring future cash flows back to the present.

🏢Terminal value estimates the value of an asset beyond the forecasted period and is critical for accurate valuation.

What is the purpose of a discounted cash flow model?

—Discounted cash flow models estimate the present value of assets based on their future cash flows, allowing for accurate valuation.

How do you forecast free cash flows?

—Free cash flows are typically projected for a 5-10 year period using historical data and assumptions based on the asset's performance and industry trends.

What is the weighted average cost of capital (WACC)?

—WACC is the discount rate used to bring future cash flows back to their present value, taking into account both equity and debt financing costs.

Why is the terminal value important in discounted cash flow models?

—The terminal value estimates the value of an asset beyond the forecasted period and is critical for accurate valuation as it represents future cash flows.

Which factors affect the accuracy of discounted cash flow models?

—The accuracy of discounted cash flow models depends on the quality of assumptions, data used for forecasting, and the chosen discount rate (WACC).

00:00Discounted cash flow models estimate the value of assets based on future cash flows.

01:15Forecast the free cash flows for a 5-10 year period based on historical data and assumptions.

01:27Calculate the weighted average cost of capital (WACC) as the discount rate to bring future cash flows to the present.

09:41Estimate the terminal value to account for the value of an asset beyond the forecasted period.

13:50Discount the future cash flows and terminal value back to their present value.

15:12Calculate the equity value and derive the implied share price.