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Understanding DCF Valuation Basics

1. DCF valuation involves discounting future cash flows and terminal value to calculate the present value of a stock. 2. Key aspects of the DCF model include forecasting future cash flows for 10 years, discounting those cash flows and the terminal value using an appropriate discount rate, and adding the present values together to get total present value. 3. The discount rate should reflect the risk of the business and is typically estimated as the weighted average cost of capital (WACC). The terminal value growth rate is usually assumed to be the long-term growth rate of the overall economy.

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Deep Borsadiya
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© © All Rights Reserved
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Topics covered

  • Economic Interest Rate,
  • Future Cash Flow,
  • Margin of Safety,
  • Discounted Cash Flow,
  • Financial Analysis,
  • Risk-Free Rate,
  • Investment Options,
  • Cash Flow Operations,
  • Stock Valuation,
  • Present Value Calculation
229 views4 pages

Understanding DCF Valuation Basics

1. DCF valuation involves discounting future cash flows and terminal value to calculate the present value of a stock. 2. Key aspects of the DCF model include forecasting future cash flows for 10 years, discounting those cash flows and the terminal value using an appropriate discount rate, and adding the present values together to get total present value. 3. The discount rate should reflect the risk of the business and is typically estimated as the weighted average cost of capital (WACC). The terminal value growth rate is usually assumed to be the long-term growth rate of the overall economy.

Uploaded by

Deep Borsadiya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Topics covered

  • Economic Interest Rate,
  • Future Cash Flow,
  • Margin of Safety,
  • Discounted Cash Flow,
  • Financial Analysis,
  • Risk-Free Rate,
  • Investment Options,
  • Cash Flow Operations,
  • Stock Valuation,
  • Present Value Calculation

B DI

1.1 Economic
Interest Rate T Stock PE t
4 because growth continue to
earning increase be Perception Price not
grow because Institution not buying
because they have other good option for investments which
is Rish free
and give high interest due to T Interest Rate
When Interest Rate T Startups Face Problems
High PE stocks start to fall PE

You need to understand economy first to Predest DCF Valuation


4 this economy help you to guss Discount Rate

DI Calculation
DCF is a method to discount Future cashflow in current yeas

DCF is a discount Value of 10 Years Future cashflow t Future


terminal Value

DCF is not widely use because in DCF Calculation we take


FCF and try to prideit for infinity years
but it is impossible to sustain FCF forever because every business have
some Cyclicality and because of that CFO can decrease or
increase
If CFO t than FCF also I and that invalid our whole calculation

If f
1 Discount

Here 65 to 70
of witiminatian
10 years Future cashflow
which grout

Value is contain in Terminal Value


to infinity tears

Remain Value is contain in Discount of 10 years Future Cashflow


4 look at Picture PV of 10 year cashflow
Pu of Terminal Value

Yay have to assume 3 things

1 10 year of FCF growth Rate


you can assume by Fundamental Analysis

I Discotun Rate Est of Capital

You can take 8 to 10 x 3 10 i Mostly


because if i invest other than storks than i can generate atleast
10h Riskfree Return
You have to take 8 to 10x because our interest Rate changes
If Interest Rates start to fall than take 9 or 8 as discount
Rate

Terminal Value Rate

We always take Max 3 to 5h Rates


because wold economy grow at that level and if Company is cashflow
grow at infinity years that that growth will be similar to world economy
growth because no one can grow at higher rate than economy growth till infinity
If Company is small or Medium size and have Future growth than you
can use 1 or Ex
If Company is already very big in M cap and have less future growth
opportunity than take only 2 to 3 i

Calculation

I 1st Stupe is we predict future cashflow for 10 Years


2 Now 10 years future cashflow by discounting Rates
discount all
3 Now we calculate Future Terminal Value
For that Multiply 10th year Future cashflow with discount Rate
Now you get Terminal year cash flow which is 11th year Future cashflow
Now Calculate Terminal Value by Formula Futureterminal
[Link]
minYeIYamtnhttg
4 Now discount terminal value by discount Rate
5 Sum Discount terminal value Pu Terminal value t Discount Present 10 years cashflow
this is your Total Value
Present
6 Devide Total Present Value by total share outstanding
7 You got share price
8 We always go for those stocks which have atleast 50 x margin of softy
So divide that stock price by 2
You get your she Ie

trace DE
Tijori Finance toot
Enter FCF current year
Enter discount Rate
Enter Pf Multiple

You will get the answer which tells you howmuch growth Rate
Companey need to achive your discount Rate

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