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Valuation RN

The Discounted Cash Flow (DCF) Model

∑FCFt(1+WACC)t+FCFn(1+g)(WACC−g)(1+WACC)n\sum \frac{FCF_t}{(1 + WACC)^t} + \frac{FCF_n (1 + g)}{(WACC - g)(1 + WACC)^n}

What is it?

A valuation method used to estimate the intrinsic value of an investment, taking into account the time value of money. For example, $1 today is worth more than $1 next year.

Key Components

  • Forecasting future cash flows and discounting them back at the weighted average cost of capital (WACC).
  • This model assumes businesses grow at heightened rates for 5-15 years and then taper off to a lower growth rate in perpetuity.
  • We add the discounted Forecasted Free Cash Flows (FCF) and the discounted perpetuity value together.
  • This gives the company’s Enterprise Value.

Adjust for Net Debt to Find Equity Value

Equity Value=Enterprise Value−Net DebtEquity \ Value = Enterprise \ Value - Net \ Debt

Calculate Intrinsic Share Price

Intrinsic Share Price=Equity ValueShares OutstandingIntrinsic \ Share \ Price = \frac{Equity \ Value}{Shares \ Outstanding}