Introduction to Discounted Cash Flow Analysis
D iscounted C ash F low Analysis or DCF is rather important. It may value any company. It requires only projected cash flows and assessment of risk. DCF is the present value of an asset’s future cash flows discounted on the risk of those cash flows. Discounted cash flow (DCF) analysis uses future (free) cash flows (projections) and brings them to the present: by discounting the expected incoming cash using a discount rate (most often using the weighted average cost of capital) to arrive at a present value. Following is an illustration. Outline Step 1: Determine the key metrics for the corporation Step 2: Calculate proforma or projected un-levered Free Cash Flow ( Un-levered FCF) Step 2: Calculate Weighted Average Cost of Capital (WACC) Step 3: Calculate Terminal value based on projected un-levered free cash. Step 4: Calculate Enterprise Value (or approximate value of the corporation) A more detailed outline of s...