Since John Burr Williams'
Theory of Investment Value in the 1930's clarified the idea of firm value, a discounted cash flow (DCF) analysis has been a pillar in finance theory and practice. Though simplicity is touted by using simple multiples, this does not eliminate the implied DCF of a financial asset. The value of any asset is the present value of all future cash generated.This raises some basic questions: when will I get my cash? How much will it be? How likely is it that I'll get it? What discount rate should I use for my estimate? Though this is far from science, and the model for analysis changes depending on the type of business (e.g., banks, manufacturers, et al.) in question, this forces one to question the future growth and profitability assumptions implied in an asset's price. Below are some key points to any simply DCF analysis:
Cost of Capital: risk-free rate + risk premium, or, opportunity cost of capital
Cash Flow Forecasting Period: long enough for the company’s top-line growth rate to be less than or equal to that of the economy.
Free Cash Flow: Operating Cash Flow – Capital Expenditures
*should be very basic and conservative
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