Discounted Cash Flow Model
When you have completed this assignment, you will be able to:

Calculate the ratios needed for a DCF valuation and average them

Use a sales forecast and your average ratios to forecast free cash flows

Calculate terminal value

Using the cash flow model, find the value of your company, the value of its equity
and its price per share

Analyze why your DCF value may differ from your company’s actual stock price
You need to find the stock price of your company using the discounted cash flow model.
In this assignment you are assuming that everything in the future is driven by sales or
earnings growth and that your income statement and balance sheet items grow at this rate.
You are also assuming that growth will be the same every year.
While this is not
absolutely true for a company’s future, it is a good enough assumption and this is what
real world analysts assume.
You are assuming that the long term growth rate will be
about the treasury bond rate.
Every asset is the sum of its discounted future cash flows.
While we have to make a lot of assumptions, this is exactly what we are doing –
forecasting the future, finding the present value of the future cash flows, subtracting
liabilities and seeing that the residual (Assets – Liabilities = Shareholders’ equity) is what
belongs to the shareholders.
1.
Find the income statement, balance sheet and cash flow statement that you
downloaded for Assignment 1.
2.
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 Fall '11
 WHITE
 Finance, Valuation

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