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    How discounted cash flow method is used as a valuation technique?

    Posted By : Ekta / Published on : 15-Sep-2017 05:31 PM / View : 1347 / Comment : 2

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    Explain the steps to be followed in valuation procedure by discounted cash flow method. How can we say that it is easiest to use for assets and firms whose cash flows are currently positive?
    Read more on : valuation technique used method cash flow discounted

    • The steps we will use will be as follows.
      1. Locate all the required financial data.
      2. Calculate the discount rate and use it to discount the future value of the business.
      3. Perform a discounted free cash flow (DCF) analysis.
      4. Calculate the company's net present value (NPV).
      5. Calculate the company's terminal value (TV).
      6. Calculate the intrinsic value.

      Intrinsic Value = Net Present Value (NPV) Discounted Terminal Value (DTV)

      Intrinsic Value Per Share = Intrinsic Value Cash – Debt / Total Shares Outstanding

      You can see through formula that while Computing Intrinsic Value per Share (Which is the difference between Market Price of Share and Share's Price based on Net Assets in the books of entity), Cash is an important ingredients to this. So Positive Cash Flow makes it easier to Compute.

      24-09-2017 / 02:19:13 PM
      Reply
    • The discounted cash flow (DCF) method is a commonly used valuation technique that is based on the present value of a company's projected future cash flows. The DCF method is used to determine the intrinsic value of a company or investment by estimating the future cash flows generated by the investment and discounting those cash flows back to their present value using a discount rate.

      The DCF valuation method involves the following steps:

      1. Project Future Cash Flows: The first step in the DCF valuation method is to project the expected future cash flows of the company or investment. This is typically done by forecasting the company's revenue, expenses, capital expenditures, and working capital requirements.

      2. Determine Discount Rate: The next step is to determine the discount rate to be used in the DCF calculation. The discount rate reflects the time value of money and the risk associated with the investment.

      3. Calculate Present Value: The projected future cash flows are then discounted back to their present value using the discount rate determined in step 2.

      4. Determine Terminal Value: In addition to projecting future cash flows, a terminal value is also estimated, which represents the value of the investment at the end of the projection period.

      5. Sum the Present Value and Terminal Value: The present value of the projected future cash flows and the terminal value are then summed to arrive at the total estimated value of the investment.

      The DCF method is a widely used valuation technique because it takes into account the time value of money and the projected future cash flows of a company or investment. However, it is important to note that the DCF method is only as accurate as the underlying assumptions used in projecting future cash flows and determining the discount rate. As such, it is important to exercise caution when using the DCF method and to carefully consider the risks and uncertainties associated with the investment being valued.

      28-03-2023 / 11:41:04 AM
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