introduction to discounted cash flow valuation
Download
Skip this Video
Download Presentation
Introduction to Discounted Cash Flow Valuation

Loading in 2 Seconds...

play fullscreen
1 / 16

Introduction to Discounted Cash Flow Valuation - PowerPoint PPT Presentation


  • 90 Views
  • Uploaded on

Introduction to Discounted Cash Flow Valuation. Nicholas Ramm Finance Sector, Madison Investment Fund October 29, 2007. What is DCF analysis?. Method of valuing a financial asset Focus on firms Uses cash flows Find present value of these cash flows. Present Value.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' Introduction to Discounted Cash Flow Valuation' - zeph-shields


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
introduction to discounted cash flow valuation

Introduction to Discounted Cash Flow Valuation

Nicholas Ramm

Finance Sector, Madison Investment Fund

October 29, 2007

what is dcf analysis
What is DCF analysis?
  • Method of valuing a financial asset
    • Focus on firms
  • Uses cash flows
  • Find present value of these cash flows
present value
Present Value
  • Value of future money today

FV

PV=

(1+R)T

the concept part 1
The Concept-Part 1

Cash Flow

Firm Value =

$1 + $2 + $3+ $4 + $5 + …

(1+R)1 (1+R)2 (1+R)3 (1+R)4 (1+R)5

Discount Rate

Need CFs forever

free cash flow
Free Cash Flow
  • Measure of money available to investors
  • FCF = (Net Inc.) +

(Depreciation/Amortization) -

(CapEx) -

(Increase in Working Capital) +

(Misc. firm-specific items)

  • All items available in financial statements
forecasting
Forecasting
  • Inherently subjective
  • Choose a forecast period and a method to generate FCFs
    • Percentage of sales, Construct new financial statements
the concept part 2
The Concept-Part 2

Firm Value =

FCF1 + FCF2 + FCF3 + FCF4 + FCF5 + …

(1+R)1 (1+R)2 (1+R)3 (1+R)4 (1+R)5

Discount Rate

Need CFs forever

terminal year
Terminal Year
  • Can’t forecast forever
  • Assume company stabilizes
  • Grows at G forever
terminal year1
Terminal Year

FCFTY * (1 + G)

TYV =

R - G

the concept part 3
The Concept-Part 3

Firm Value =

FCF1 + FCF2 + FCF3 + FCF4 + FCF5 +…+ TYV

(1+R)1 (1+R)2 (1+R)3 (1+R)4 (1+R)5 (1+R)TY

Discount Rate

discount rate
Discount Rate
  • Cash Flows and Terminal Year Value must be discounted
  • Need rate that takes into account relative risks of business
weighted average cost of capital
Weighted Average Cost of Capital

E

D

R* =

RE *

RD *

* (1-t)

+

D+E

D+E

Weighted Average Debt interest rate

Obtain Using CAPM

capital asset pricing model
Capital Asset Pricing Model

RE =

RF + β * (Rm – Rf)

putting it all together
Putting it All Together

Firm Value =

FCF1 + FCF2 + FCF3 + FCF4 + FCF5 + …+TYV

(1+R*)1 (1+R*)2 (1+R*)3 (1+R*)4 (1+R*)5 (1+R*)TY

limitations
Limitations
  • Forecasting error:
    • Future cash flows
    • Future capital structure
    • Terminal growth rate
  • Assume unchanging firm
    • Capital Structure
    • Terminal growth rate
ad