Key Components Of A Discounted Cash Flow Valuation

1247 Words 5 Pages
Discounted Cash Flow (DCF) - This is a valuation method which used to estimate the attractiveness of an investment opportunity. This DCF valuation is solely based on the principle that the value of the business or asset is inherently based on its capability to generate cash flows for the people investing capital in the business. The Discounted cash flow (DCF) analysis uses cash flow projections which are future free and discounts them (most often using the weighted average cost of capital method) in order to arrive at a present value, which in turn is used to evaluate the potential for investment. If the value arrived at through the Discounted Cash Flow analysis is higher/greater than the current cost of the investment, the opportunity will …show more content…
The Key Components of a Discounted Cash Flow are as follows:

 Free cash flow (FCF) – It includes the cash generated by the assets used in the business (both tangible and intangible) available for distribution to all of the capital investors. Free Cash Flow is often also referred to as the unlevered free cash flow, as it depicts the cash flow available to all the capital investors and is not at all affected by the total capital structure of the business.

 Terminal value (TV) – It depicts the value at the end of the Free Cash Flow projection period (which is also known as the horizon period).

 Discount rate – This is the rate which is used to discount the projected Free Cash Flows and the respective terminal value to their present values.

Cash Flow= Net profit-(Required change in working capital+ Investment)
Cash Flow (year 1) =
…show more content…
These investments often show a negative cash flow and earnings and are quite uncertain, but there is also possibility of substantial future rewards which are attached to it. The VC method accounts for all this simply by applying a multiple at one point of time in the future when it’s projected to have a positive cash flow and/or earnings.VC also uses the discounted terminal value and the size of proposed investment in order to calculate the desired ownership stake.
The valuation & the risk assessment are strongly affected & also influenced by the audience & channel strategies. It is crucial for any company as they are important even for the start-ups & growing organizations which have less marketing power & are still building upon their brand name. The main purpose of the classification in this case study is basically 2 fold:
a) Identifying & analyzing the competitors also evaluating & determining their market value.
b) Identifying the interests of the customers and also analyzing the

Related Documents