Learn Financial Modeling : Discounted Cash Flow statement (DCF) Methodology
1. What is a DCF model?
A basic DCF model involves projecting future cash flows and discounting them back to the present using a discount rate (weighted average cost of capital) that reflects the riskiness of the capital you then add up all those discounted cash flows and the sum is really the intrinsic value of the company (equity Value). You can find an example in the financial summary page of a stock lets pick Apple Inc:
This is why so many people of the industry compare that value to market values to determine if something is overvalued, undervalued or valued correctly. As you can see here in our example Apple's DCF is 191.92 which is higher than its actual price of 174.72 this is why the recommendation is a Buy (You could buy the stock hold it until it reach its intrinsic value of 191.92 and make 15 dollars of benefit)
So it really is an important form evaluation and almost all people in finance use this valuation to a certain degree it's also worth noting that they are many different variations of the DCF but they are generally two different types unlevered and levered.
Unlevered DCF are before the payment of debts. So you will see that we are dealing with items like EBIT, EBIAT (which mean its before the payment of interests as well as debt pay down).
Levered is on the other hand after the interest expense and after debt pay down.
You can consult our ranking of stocks on DCF or choose a stock to get its DCF.
Next we will start building our free cash flow statement in order to project our free cash flow for the next five year. Go to free cash flow build up.