discounted cash flow valuation pdf

Calculate the future earnings and cash flows of Saudi Aramco by estimating an expected growth rate in earnings (GDP growth). n�3ܣ�k�Gݯz=��[=��=�B�0FX'�+��t��G�,�}��/��Hh8�m�W�2p[��AiA��N�#8$X�?�A�KHI�{!7�. 0000001808 00000 n 446 0 obj<> endobj 2! Discounted Cash Flow Valuation! " 0000001315 00000 n 0000009785 00000 n Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows. 0000012364 00000 n Discounted cash flow analysis is widely used in investment finance, real estate development, corporate financial management and patent valuation. 0000009548 00000 n 0000005516 00000 n 0000001499 00000 n <<9f1791162ab9b045bed743072c136424>]>> xref 0000008607 00000 n endstream endobj 447 0 obj<>/OCGs[449 0 R]>>/PieceInfo<>>>/LastModified(D:20040531125338)/MarkInfo<>>> endobj 449 0 obj<>/PageElement<>>>>> endobj 450 0 obj<>/Font<>/XObject<>/ProcSet[/PDF/Text/ImageC/ImageI]/ExtGState<>>>/StructParents 0>> endobj 451 0 obj<> endobj 452 0 obj[/Indexed 461 0 R 15 463 0 R] endobj 453 0 obj<> endobj 454 0 obj<> endobj 455 0 obj<>stream 0000012690 00000 n Valuation using discounted cash flows (DCF valuation) is a method of estimating the current value of a company based on projected future cash flows adjusted for the time value of money. 0000015515 00000 n 448 0 obj<>stream 0000015360 00000 n endstream endobj 456 0 obj<> endobj 457 0 obj<> endobj 458 0 obj<> endobj 459 0 obj<> endobj 460 0 obj<>stream 0000007325 00000 n The cash flow is then discounted back to In the ca se of firm valuation by disc ounted free cash flow t o the firm, it is 2y�.-;!��K�Z� ��^�i�"L��0��-�� @8(��r�;q��7�L��y��&�Q��q�4�j��|�9�� Recognize how forecasts of revenues, costs, and capital investment are constructed, how the individual estimates relate to each other, and how the forecasts depend upon the underlying … CODES (3 days ago) Aswath Damodaran 2 Discounted Cashflow Valuation: Basis for Approach n where CF t is the cash flow in period t, and r is the discount rate appropriate given the riskiness of the cash flow and t is the life of the asset. 0000007097 00000 n <]>> А�{��A��f�P��`Ĵ��}�)�+��f=��z�`UzL L�@��C�vs� � 0000002717 00000 n 0000003168 00000 n 915 0 obj<>stream If the cash flows 0000011230 00000 n startxref 0000016088 00000 n 0000003526 00000 n 0000001953 00000 n %%EOF 0000003367 00000 n It then discusses the basic rationale, terminology, and mechanics of the model, and points out how it may be used in either a forward‐looking manner or a backward‐looking manner. 0000003850 00000 n P%4h�( I!�p�8��x�a1B�Q*��)I� ��Bi�Y�9�y*�E%5��u��jI !��ʂ�Ɗ�2��6IH6�t��wN j�j��h��֪2�|��I3�Z@V͚:m�l$H/��`��9*K�._�jʢ�W"Y(,��Y�JXh�Zh��u ��l�� 2i4 G�R@��4:�Ճ�.H�U�v�E#�!��[ *��_��) ��zTx�&�3%T�oh�`h�h6Rd`��^��i�;��3�Mqρ�M�L��,�c This illustrates how a higher risk of investing (a higher WACC) also reduces the value of the cash flows and thereby the valuation. Aswath Damodaran 2 Discounted Cashflow Valuation: Basis for Approach n where CF t is the cash flow in period t, and r is the discount rate appropriate given the riskiness of the cash flow and t is the life of the asset. x�b```b``��d|d`@ V da�x� VĠ��q�ыA��Sl�DNn^F�>�N�S�?��s �1�e�`�N�umkJ�չ�� *�� 0000008411 00000 n 1998:1 Abstract All steps of the discounted cash ﬂow model are outlined. The DCF valuation models are based on the assumption that the value of any firm is the present value of the expected cash flows. x�b```b``��b,ys8�0^8b�`�q%�5��$��'�n�̽��@��r�⑾Łx��,7?�� 4��?7�� DCF analysis attempts to figure out the value of … 0000002858 00000 n 0000002255 00000 n You could start with a base rate from the 10-year U.S. Treasury Bill, and then start adding from there. Construct firm-level estimates of the pro forma income statement, balance sheet, and cash flow from assets based on store-level estimates. 0000012447 00000 n View Valutation v 03 2020.pdf from GSEM S220005 at University of Geneva . Then, through the use of the Capital Asset Pricing Model (CAPM) for the derivation of cost of equity, the cash flows and the terminal value are discounted �x��- ��[�� 0��}��y)7ta��>j��T�7��@��tܛ�`q�2��ʀ��&��6�Z�L�Ą?�_��yxg)˔z��çL�U��*�u�Sk�Se�O4?׸�c��.� � �� R� ߁��-��2�5�� S�>ӣV��d�`r��n~��Y�&�+`��;�A4�� A9� =�-�t��l�`;��~p�� Gp| ��[`L��`� "A�YA�+��Cb(��R�,� *�T�2B-� 0000005901 00000 n 0000004179 00000 n endstream endobj 465 0 obj<>/W[1 1 1]/Type/XRef/Index[91 355]>>stream flow. 0000002403 00000 n Discounted cash flow valuation models - PDF Free Download (14 days ago) Discounted cash flow (DCF) analysis uses future free cash flow (FCF) projections and discounts the cash flow to get the present value that can be used to estimate the potential for investment. 0000002800 00000 n 0000007885 00000 n 446 20 B40.3331" Aswath Damodaran" Aswath Damodaran! 0000005469 00000 n The value of an investment is the discounted value of all estimated future liabilities and benefits. DCF Formula in Excel endstream endobj 914 0 obj<>/OCGs[916 0 R]>>/PieceInfo<>>>/LastModified(D:20070801155015)/MarkInfo<>>> endobj 916 0 obj<>/PageElement<>>>>> endobj 917 0 obj<>/Font<>/XObject<>/ProcSet[/PDF/Text/ImageC/ImageI]/ExtGState<>/Properties<>>>/StructParents 0>> endobj 918 0 obj[919 0 R 920 0 R 921 0 R 922 0 R 923 0 R 924 0 R 925 0 R] endobj 919 0 obj<>/Subtype/Link/A 955 0 R/StructParent 1>> endobj 920 0 obj<>/Subtype/Link/A 954 0 R/StructParent 2>> endobj 921 0 obj<>/Subtype/Link/A 953 0 R/StructParent 3>> endobj 922 0 obj<>/Subtype/Link/A 951 0 R/StructParent 4>> endobj 923 0 obj<>/Subtype/Link/A 950 0 R/StructParent 5>> endobj 924 0 obj<>/Subtype/Link/A 949 0 R/StructParent 6>> endobj 925 0 obj<>/Subtype/Link/A 948 0 R/StructParent 7>> endobj 926 0 obj<> endobj 927 0 obj<> endobj 928 0 obj[/ICCBased 952 0 R] endobj 929 0 obj[/Indexed 928 0 R 255 956 0 R] endobj 930 0 obj<> endobj 931 0 obj<> endobj 932 0 obj<> endobj 933 0 obj<>stream In other words, a dollar today is worth more than a dollar tomorrow. A Tutorial on the Discounted Cash Flow Model for Valuation of Companies L. Peter Jennergren ∗ Ninth revision, December 13, 2011 SSE/EFI Working Paper Series in Business Administration No. 0000005962 00000 n '�F��M��ĝi�D@a�v�=�:��jtp�W ;tVCam��$ù۴�U��e�8w[t�f�I�A��5��v݈��2{�C��9sVq�DZh2��{s�6_��\@;�#"ojL�sd�2�K�;�� COUPON (11 days ago) Discounted cash flow (DCF) analysis uses future free cash flow (FCF) projections and discounts the cash flow to get the present value that can be used to estimate the potential for investment. At the interest rate of 10 percent, this $85,000 would grow to: (1 1 .10) 3 $85,000 5 $93,500 next year. 0000008571 00000 n Discounted Cashﬂow Valuation: Equity and Firm Models Aswath Damodaran. It was used in industry as early as the 1700s or 1800s, widely discussed in financial economics in the … Only in cases where there is a predetermined fixed cash flow (rent) can a valuation be considered to be “correct”. Thus, the discounted cash flow (DCF) method is 0000002846 00000 n 0000004368 00000 n endstream endobj 958 0 obj<>/W[1 1 1]/Type/XRef/Index[202 711]>>stream 913 46 UBS Global Research Valuation Series Discounted Cash Flow Analysis August 1997 4 Overview Used by bankers and accountants, but rarely by analysts Discounted cash flow (DCF) valuations are numerically intensive and, therefore, their use only became common-place when low-cost desktop computing was widely available in the 1980s. Valuation Program Discounted Cash Flows and Comparable Companies Analysis … T��$P��W��O��4TZXH�AR��7��? The weighted average cost of … �~��IDలZh��Zn�>�hWžZ��]^�� W�؋��x"B�t��"8��GS#��S�x��٘`~h6uS-�E[�R�c�ߌ�X�Q*�P)�^#q(��%��R/ trailer Discounted Cash Flow Valuation: The Steps l Estimate the discount rate or rates to use in the valuation – Discount rate can be either a cost of equity (if doing equity valuation) or a cost of capital (if valuing the firm) – Discount rate can be in nominal terms or real terms, depending upon whether the cash flows … Discounted cash flow (DCF) is a method of valuation used to determine the value of an investment based on its return or future cash flows. j ��F�)^�Y�{aV�+[�e��K��3��ZM�n�Z�ȲxjCӣk~!�,z��)�Bv�p�K�10��ut000��Ut0��I`�� `zGD�I &� 0000005664 00000 n %%EOF N'��)�].�u�J�r� Present value = discounted back to the time of the investment . startxref rates can lead to serious errors in valuation. It is described as "discounted" cash flow At the interest rate of 10 percent, this $85,000 would grow to: (1 .10) $85,000 $93,500 next year. x�bb�g`b``Ń3� ��#/> ��Q 0000004509 00000 n The fourth step in Discounted Cash Flow Analysis is to calculate the … By Danielle Stein Fairhurst . 0 In the same manner, the resi-dual income, created each year for shareholders along with the terminal value of the bank, is estimated. Then, you have the difficult job of assigning an appropriate discount rate. x�bb��8�f�;��1�G�c4>F�h|��(�� 0 V� ] • The present value of a company (what it is currently worth) is equal to all of the company’s future cash flows (all of the money it expects to generate in the future), discounted to present day $ dollars ♦ Very literally, this is why it is known as the “Discounted Cash Flow” model – it is projecting the future cash flows of a company H��WMo7��W� ͈��6vR��z�e#�c��J��J��|o8�C�?��UZ}��FM��6A�T��o��M>�&��L+T�ǉ�]��\�K�Ջ�U��B��'_�g��z��^��j�+cؠf�ɛ��ߓׁD@-wا��c�v�S�M��Cr~~(�]k��d��n�h zfӡ�el@0�urQ��#�貏U V�Q��(��S��l녪��*obc��e7�i�}��yK�>�Mi/�d��)&��Q_�7H�Z�29�aD�L:��j��u �-� ��8��Vek,Y`G��r�Z�!�Ry?�` ��o�=f��DZրƧ�X�@x96�P�sn��ڧ.7�Hܼ&��H#et�RP&Ԉ�R&N�Qn1�ALFWM�E��aL�P��02D��\�� Rt��\ϫ�=��Xf`�R��(�Ү�eNz=�GݒS�t��.׉'e��&c�3g2�4�GR{Uȭ��LP��\T��X�ntQ'Ӆ��P��z�V��s�o��@ =V*�y��4XYgX�:�n��`��}�f�W-ǂ%�GW��w� ��)j�8ؗ=��]c��2��LĠ��ަf��K}�0��͠��x'� �dȪ^|�ho԰&��b�U�Y+�`+�g�z#A@�[g��G�O�"�{z�H��p�5�a~}N;�2`�0�� ڗ�r�~e>��0r�tK^}a,�A�hQ�2Q(��}Z)a/��%�25v|��%;��|"�4�|��s��D2"�0��;x|�\y��Ʀ毇E�G;$D;1��q^t��{; �K�>��/�H˪Y��/��Z��z��S��O^٣W��842Hpl��!g�E-�xZ'�r��n��f�g>��Pu*��l��I��WV�D��Pj��čj/u��]��Cs��t�^�K�Q�:��M�{R�W��/o��fQ�.��C��3Z^��nI.f�ˈݟ@AfՓC��^A��et-eㄘR��$hm�}�_� ��L� To calculate the discounted cash flow, estimate the cash the business will earn this year and estimate the growth rate for the next 5 to 10 year. 0000010786 00000 n [PDF] Discounted Cash Flow Valuation - Free Download PDF. 913 0 obj<> endobj 0000005436 00000 n d6 2 0000012606 00000 n Be Careful! Calculate the current earnings and cash flows of Saudi Aramco for equity investors and for all claimholders. %PDF-1.4 %�� Chapter 4 Discounted Cash Flow Valuation Figure 4.2 Cash Flows for Land Investment Cash inﬂow $91,000 Time Cash outﬂow 0 1 2$85,000 that Kaufman & Broad puts the same $85,000 into similar alternative investments. This chapter introduces the discounted cash flow (DCF) valuation model, perhaps the most basic construct in property valuation, and in the tools discussed in this book. 0000011070 00000 n 0 0000004884 00000 n 0000004344 00000 n }� �g�|/�Sk�M)*o\\�fc*?�k_�8. 0000001241 00000 n Discounted cash flow valuation models - PDF Free Download. 0000015442 00000 n 0000015591 00000 n 0000005433 00000 n Moreover, given the discount factor formula above, the higher the WACC %, the lower the discount factor, which in turn means a lower monetary value of the cash flows. %PDF-1.4 %�� Calculating the Terminal Value. In simple terms, discounted cash flow tries to work out the value of a company today, based on projections of how much money it's going to make in the future. Estimate firm value using a discounted cash flow approach. The cash flows are made up of those within the “explicit” forecast period, together with a continuing or terminal value that represents the cash flow stream after the forecast period. 0000010211 00000 n 0000003293 00000 n Discounted Cashﬂow Valuation: Basis for Approach" " " " where CF t is the expected cash ﬂow in period t, r is the discount rate appropriate given the riskiness of the cash ﬂow and n is the life of the asset." 0000000710 00000 n 0000002205 00000 n �L�4��9j8��͘��̘�@�1�ě��M3`z��!P�� T��`�!PbX��a�Ǚ�v008J �h�҇?�3�3=��f`̀t�굫�,[�t�E�W,��`��y3gϘ>e��Y��Nh�o��T_VWZ[Q�X�P\PTU�_^��k�l��ab�nemfnjib�m��o�g�c�˩��ȮĦ̪ʢƬ` �>� 0000006569 00000 n ��0�2�#�E��X �2��&�0�3�b��@J��ɍ�3�ǒ�w�7�2�1ʰi04�6�5�6�1*1[�� M��Z��W�f`�⬁؟�q�ȫ�/ Z 2�R • Cash flow = $30 • G =7% • Value = NOI/k = $100/10% = $1000 or CF/(k‐g) = $30/(.10‐.07) = $1000 • NOT $100/(.10‐.07) = $3,333. ��w�G� xR^��[�oƜch�g�`>b��$��*~� �:��E��b��~��,m,�-��ݖ,�Y��¬�*�6X�[ݱF�=�3�뭷Y��~dó ��t��i�z�f�6�~`{�v��.�Ng��#{�}�}��j��c1X6��fm��;'_9 �r�:�8�q�:��˜�O:ϸ8��u��Jq��nv=��M��m��R 4 � Knowing how the discounted cash flow (DCF) valuation works is good to know in financial modeling. Discounted cash flow valuation models - PDF Free Download. n At an intuitive level, the discount rate used should be consistent with both the riskiness and the type of cashflow being discounted. xref If we break the term NPV we can see why this is the case: Net = the sum of all positive and negative cash flows. Proposition 1: For an asset to have value, the expected cash flows have to be positive some time over the life of the asset. 0000012530 00000 n DCF analysis says that a company is worth all of the cash that it could make available to investors in the future. Discounted Cash Flow Valuation Figure 4.2 91 Cash Flows for Land Investment Cash inflow $91,000 Time 0 1 $85,000 Cash outflow that Kaufman & Broad puts the same $85,000 into the bank. 0000004014 00000 n 0000037273 00000 n 0000003091 00000 n In finance, discounted cash flow analysis is a method of valuing a security, project, company, or asset using the concepts of the time value of money. 0000010830 00000 n ... Free Cash Flow to Equity (over a extended period) • (b)For ﬁrms where FCFE are difﬁcult to estimate (Example: Banks and Financial ... Value of Equity per Share = $2.26*1.02 / (.0742 -.02) = $ 42.53 discounted cash flows and di scounted residual period, the value of equity is obtained. 0000006039 00000 n • Equity versus Firm : If the cash flows being discounted are cash flows to equity, the appropriate discount rate is a cost of equity. At the interest rate of 10 percent, this $85,000 would grow to: (1 .10) $85,000 $93,500 next year. 0000037174 00000 n 0000005738 00000 n 0000000016 00000 n The discounted cash flow valuation method (or also the DCF method) is an income-based valuation approach that derives the value of a business or an asset from its expected future free cash flows.. 0000008957 00000 n 2 Fundamentals of the discounted cash flow approach 2.1 DCF valuation involves projecting estimated cash flows over an assumed investment holding period, plus an exit value at the end of that period, usually arrived at on a conventional ARY basis. NPV = F / [ (1 + r)^n ] where, PV = Present Value, F = Future payment (cash flow), r = Discount rate, n = the number of periods in the future. M H��yTSw�oɞ��c [��5la�QIBH�ADED��2�mtFOE�.�c��}��0��8�׎�8G�Ng��9�w��߽�� '��0 �֠�J��b� `�(415�1Lhb0b�`ȼ��iB�y Value is therefore based on future forecasts, which can be modelled either implicitly or explicitly. 0000011789 00000 n 0000004852 00000 n �ꇆ��n��Q�t�}MA�0�al��S�x ��k�&�^��>�0|>_�'��,�G! 0000000016 00000 n CODES (10 days ago) Discounted cash flow (DCF) analysis uses future free cash flow (FCF) projections and discounts the cash flow to get the present value that can be used to estimate the potential for investment. "F$H:R��!z��F�Qd?r9�\A&�G��rQ��h��E��]�a�4z�Bg��E#H �*B=��0H�I��p�p�0MxJ$�D1��D, V��ĭ��KĻ�Y�dE�"E��I2��E�B�G��t�4MzN��r!YK� ��?%_&�#��(��0J:EAi��Q�(�()ӔWT6U@��P+��!�~��m��D�e�Դ�!��h�Ӧh/��']B/��ҏӿ�?a0n�hF!��X��8��܌k�c&5S��6�l��Ia�2c�K�M�A�!�E�#��ƒ�d�V��(�k��e��l ��}�}�C�q�9 Calculate Saudi Aramco’s Discounted Cash Flow … DISCOUNT (2 days ago) Discounted Cash Flow Valuation Figure 4.2 91 Cash Flows for Land Investment Cash inflow $91,000 Time 0 1 $85,000 Cash outflow that Kaufman & Broad puts the same $85,000 into the bank. 0000003685 00000 n H��n�0E��Y6��G��@� �j��ȩ�~}Iʏ�U�@��̽3#%��6Y�s ��s`I�$(;�ʆq��W�ر�c�s�O��4��JHp}�rp �V��)g�B�0�i�W��8#�8wթ��8_�٥ʨQ��Q�j@�&�A)/��g�>'K�� t�;\�� ӥ$պF�ZUn��(4T�%)뫔�0C&��Z��i��8��bx��E��B�;��P��ӓ̹�A�om?�W= ��li�X�`z�]`zbpc� Academia.edu is a platform for academics to share research papers. Essential steps are: along with the terminal value of the bank are calculated. trailer Title: Equity Valuation Using Discounted Cash Flow Method - A case study: Viking Line Ltd Supervisor (Arcada): Andreas Stenius Commissioned by: Abstract: The value of an asset is the future cash flow it can generate discounted at an opportunity rate that reflects the risks of the asset. The core concept of the DCF is that of the basic finance concept of the time value of money, which states that money is worth more in the present than the same amount in the future. Both the riskiness and the type of cashflow being discounted the future earnings and cash flows cashflow being discounted used! Investment is the present value of an investment is the present value = discounted back the. Of the investment discount rate could start with a base rate from 10-year! In cases where there is a predetermined fixed cash flow ( DCF ) works! 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Financial management and patent valuation are: [ PDF ] discounted cash flow from assets based on future forecasts which! Steps of the investment, a dollar tomorrow future liabilities and benefits all estimated future liabilities and.. Platform for academics to share research papers to be “ correct ” rate from the 10-year U.S. Treasury Bill and! Being discounted development, corporate financial management and patent valuation make available investors. Pro forma income statement, balance sheet, and then start adding from there Equity and... All steps of the expected cash flows of Saudi Aramco by estimating an expected growth in. A base rate from the 10-year U.S. Treasury Bill, and cash flow models. Earnings and cash flows of Saudi Aramco for Equity investors and for all claimholders is widely used in investment,! Expected cash flows Aswath Damodaran rent ) can a valuation be considered to be “ correct ” investment is discounted. 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