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Discounted Cash Flow Model

Discounted Cash Flow Model - Valuation Discounted Cash Flow...

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Valuation: Discounted Cash Flow Model
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Discounted Cash Flow Model Equates the value of company equity with the present value of future free cash flows to equity Free cash flows can be thought of as the cash available to shareholders after outlays for operations and financing have been made Discount rate is the cost of equity capital 2
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DCF Framework Equates current stock price to the present value of all future expected free cash flows As you can see, it is very similar to the Dividend Discount Model 3 IV0 = CF1 1 + re CF2 (1 + re)2 + CF3 (1 + re)3 + CF4 (1 + re)4 + + …
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Balance Sheet Mechanics Assets = Liabilities + Stockholder’s Equity Split Assets/Liabilities into “Operating” and “Financial” to get: OA + FA = OL + FL + SE OA – OL = FL – FA + SE Net OA = Net FL + SE Net OA – Net FL = SE Therefore: Net Cash Flows from Operations – Net Cash Flows to Debt Holders = Net Cash Flows to Equity
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Two Ways to Value Cash Flows Value equity directly in one step PV (Net OA – Net FL) = PV (SE) Discount rate is the cost of equity Value equity in two steps
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