Discounted Cash Flow

DCF

one of the most important methods used to value a company. A DCF is carried out by estimating the total value of all future cash flows (both inflowing and outflowing), and then discounting them (usually using Weighted Average Cost of Capital - WACC) to find a present value of that cash

Calculate the Discount Rate

this is either taken to be a simple percentage or is calculated using WACC

Project Future Cash Flows

this is usually done from a 3-statement projection model or by using simple assumptions about Revenue, Tax, Depreciation, Amortization etc and calculating free cash flow from there

Aim of DCF

to estimate the total amount of cash you will receive from an investment, and if this value is higher than the cost of the investment, it is usually worth doing.

Find the Net Present Value

to find the net present value simply discount the terminal value (again using WACC or a simple %) and then add that to the sum of the discounted cash flow values

Estimate Terminal Value

Terminal Value is then estimated either by using a terminal exit multiple (usually an EBITDA multiple) or with a Terminal Growth Rate (Gordon Growth Method)

Discount Future Cash Flows

either by using the Mid-Year discount or a simple discount period, it is fairly simple to calculate the present value of future cash flows

The process behind creating a DCF model

Project Future Cash Flows Calculate the Discount Rate Discount Future Cash Flows Estimate Terminal Value Find the Net Present Value