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. 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. Let us pick Apple Inc:
Many people of the industry compare DCF value to market value to determine if something is overvalued, undervalued, or valued correctly. As you can see in our example Apple’s DCF is 228.25 which is lower than its actual price of 497.48. Therefore, the DCF recommendation is a sell. Notice that the overall recommendation above is a Strong Buy which is a weighted summary from all of the buy and sell ratings on the right.
So, it really is an important form of evaluation and almost all people in finance use this valuation to a certain degree. It is worth noting that there are many different variations of the DCF. There are generally two different types unlevered and levered.
Unlevered DCF is before the payment of debts. You will see that we are dealing with items like EBIT, EBIAT (which means it is before the payment of interest as well as debt pay down).
Levered is after the interest and debt expenses are paid down.
You can choose a stock to get the DCF from our homepage search box.
Next, we will start building our free cash flow statement to project our free cash flow for the next five years. Go to free cash flow build up.