What is the DCF method and why might we use this?

Solutions

Expert Solution

Discounted cash flow method or DCF method is one of the primary and important methods used in valuation. The premise of the model is around the fact that the value of the company today is the present value of future cash flows. Thus, discounting of future free cash flow is done using required return of capital to get present value of firm today.

If the discounted value is more than cost required to buy then the underlying asset may be undervalued and considered a good buy. If however, the projections of future cash flow are inaccurate then the value obtained using this method may be incorrect.

DCF value = CF1/(1+r) + CF2/(1+r)^2 +... CFn/(1+r)^n

Where CF1,2..n are cash floes in year 1,2..n respectively. And r is discount rate.

DCF is widely used as it gves fundamental value of the underlying. It relies on free cash flows and gives an overview of the intrinsic value of the underlying. It gives a single figure that helps management to decide whether to undertake the project or invest in the project. It makes comparison between projects easier.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Why DDM and DCF valuation method are suitable/okay to use for valuing airlines ?

Why is it important that we allocate overhead costs to products? What might we use this...

Why is it important that we allocate overhead costs to products? What might we use this information for? How do you think a company chooses an overhead allocation method? While not mandatory for credit, I highly encourage you to read your classmates thoughts and comment on their reflections. You may be able to help each other! I will be reading your discussions and commenting both on the board itself and on the grading screen.'

Why is it important that we allocate overhead costs to products? What might we use this...

Why is it important that we allocate overhead costs to products? What might we use this information for? How do you think a company chooses an overhead allocation method?

What is the significance of the Baltimore classification? How might we be able to use this...

What is the significance of the Baltimore classification? How might we be able to use this type of classification to learn more about viruses or ways to target them for treatments?

What types of organization might use the periodic system? Why?

What types of organizations might use the perpetual system? Why?

What is the high-low method? Why would an organization use this method? What are the benefits...

What is the high-low method? Why would an organization use this method? What are the benefits and pitfalls? Justify your answers Proverbs 15:22 states: “Without deliberation plans came to nothing, where counselors are many, plans succeed.” How does this tie back to costing standards?

Sensory Questions: What changes in pain might occur with an injury? Why might we see changes...

Sensory Questions: What changes in pain might occur with an injury? Why might we see changes in pain after an injury? Give some vital features of inhibitory interneurons.

1. When using the high-low method, why might we be concerned about our estimates for variable...

1. When using the high-low method, why might we be concerned about our estimates for variable cost per unit and total fixed costs? 2. Are variable costs and differential costs the same thing? Why or why not?

What are the ledgers, why do we use them? And then HOW do we use them,...

What are the ledgers, why do we use them? And then HOW do we use them, how does information get into them how do balances get extracted. And then what should the balances for various accounts be, i.e. assets, liabilities, expenses, revenues, equity, dividends. Why SHOULD they have a particular balance as either debit or credit.

Subjects