Discounted Cash Flow Robert Karpinski. What is it? A Discounted Cash Flow (DCF) is generally considered the best tool to value a company.

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Presentation transcript:

Discounted Cash Flow Robert Karpinski

What is it? A Discounted Cash Flow (DCF) is generally considered the best tool to value a company

First… We estimate the future free cash flows of a company.

Free Cash Flow (We have to estimate these values!)

What it might look like…

But… As we learned money is not comparable at different points in time, it has to be “Discounted”

The Methods The Weight Adjusted Cost of Capital (WACC) Or... The Adjusted Present Value (APV)

So… Right now we’ll just worry about WACC

Capital Asset Pricing Model(CAPM) r e : interest/Opportunity cost of equity

WACC r e : interest/cost of equity (from CAPM) r d : interest/cost of debt

Terminal FCF Choose a terminal Growth Rate based off similar companies in late stage/cycle

Putting it all together NPV: Net present Value

But wait… To apply this to equities.