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DCF Valuation Raimundo Valdés Fresno

Valuing a company via Discounted Cash Flow (DCF) analysis involves estimating its future cash flows and discounting them back to present value using an appropriate discount rate. It provides a comprehensive way to assess a company's intrinsic value based on expected future cash generation and involves 11 steps including forecasting cash flows, determining discount rates, discounting cash flows, and comparing the intrinsic value to market price.

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25 views3 pages

DCF Valuation Raimundo Valdés Fresno

Valuing a company via Discounted Cash Flow (DCF) analysis involves estimating its future cash flows and discounting them back to present value using an appropriate discount rate. It provides a comprehensive way to assess a company's intrinsic value based on expected future cash generation and involves 11 steps including forecasting cash flows, determining discount rates, discounting cash flows, and comparing the intrinsic value to market price.

Uploaded by

rvaldesf98
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Valuing a company via Discounted Cash Flow (DCF) analysis involves estimating its

future cash flows and discounting them back to present value using an appropriate discount
rate. It's a widely used method in finance and investing because it provides a
comprehensive way to assess the intrinsic value of a company based on its expected future
cash generation. Here's an extensive guide on how to value a company via DCF:

Step 1: Understand the Basics


1. Cash Flows: DCF relies on estimating the future cash flows generated by the
company. This includes both operating and non-operating cash flows.
2. Discount Rate: The discount rate, often referred to as the Weighted Average Cost
of Capital (WACC), represents the opportunity cost of capital and is used to
discount future cash flows to their present value.
3. Terminal Value: DCF also requires estimating the terminal value, which represents
the value of the company at the end of the explicit forecast period.

Step 2: Gather Information


1. Financial Statements: Collect the company's historical financial statements
including income statement, balance sheet, and cash flow statement.
2. Market Data: Gather market data such as risk-free rate, equity risk premium, and
industry-specific data.

Step 3: Forecast Cash Flows


1. Revenue Forecast: Project future revenues based on historical growth rates, market
trends, and industry analysis.
2. Operating Expenses: Estimate future operating expenses including cost of goods
sold (COGS), selling, general, and administrative expenses (SG&A), and research
and development (R&D) expenses.
3. Depreciation & Amortization: Forecast depreciation and amortization expenses
based on the company's capital expenditure plans.
4. Taxes: Estimate future taxes based on the company's tax rate and projected taxable
income.
5. Working Capital Changes: Consider changes in working capital such as accounts
receivable, inventory, and accounts payable.
6. Capital Expenditures: Estimate future capital expenditures required to maintain
and grow the business.

Step 4: Calculate Free Cash Flows


1. Operating Cash Flow: Subtract operating expenses, taxes, and changes in working
capital from revenue to calculate operating cash flow.
2. Capital Expenditures: Subtract capital expenditures from operating cash flow to
calculate free cash flow.
Step 5: Estimate Terminal Value
1. Perpetuity Growth Method: Estimate the terminal value using the perpetuity
growth method, which assumes that free cash flows will grow at a constant rate
indefinitely beyond the explicit forecast period.

Step 6: Determine the Discount Rate (WACC)


1. Cost of Equity: Calculate the cost of equity using the Capital Asset Pricing Model
(CAPM) or other methods.
2. Cost of Debt: Determine the cost of debt based on the company's borrowing rates
and credit risk.
3. Weighted Average Cost of Capital (WACC): Calculate the WACC using the
weights of equity and debt in the company's capital structure.

Step 7: Discount Cash Flows


1. Discount Cash Flows: Discount each year's free cash flow and the terminal value
back to present value using the WACC.

Step 8: Calculate Intrinsic Value


1. Sum of Present Values: Sum up the present values of all future cash flows to
calculate the intrinsic value of the company.

Step 9: Sensitivity Analysis


1. Scenario Analysis: Conduct sensitivity analysis by varying key assumptions such
as revenue growth rate, discount rate, and terminal growth rate to understand the
impact on the intrinsic value.

Step 10: Compare with Market Price


1. Compare with Market Price: Compare the intrinsic value obtained from DCF
analysis with the current market price of the company's stock to determine if it's
undervalued, overvalued, or fairly valued.

Step 11: Monitor and Update


1. Monitor and Update: Regularly monitor the company's performance and update
the DCF analysis with new information to ensure the valuation remains accurate and
relevant.
Remember, DCF analysis is based on several assumptions and forecasts, so it's essential to
exercise caution and incorporate a margin of safety in your valuation to account for
uncertainties and risks. Additionally, seeking the advice of financial professionals or
conducting peer reviews can help validate your analysis and improve its accuracy.

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