GWV 009: Part A - Valuation Methods (DCF)
Play • 12 mins
For this episode we will be discussing two different valuation methods. We will break up the episode into two parts, in part A we will look at the Discounted Cash Flow Model and in part B we will look at how to calculate the Liquidation Value of a business.
In this episode we will look at the Discounted Cash Flow method, we will be applying many of the topics we have discussed in previous episodes such as; Discount Rates, Cash Flow and Growth, so if you have not already listened to those episodes I would recommend you go back now and have a listen.
The Discounted Cash-Flow Method is one of the most popular and widely used valuation techniques. It is basically the addition of all future free cash flows which have been discounted annually by the Discount Rate, which we discussed in episode 5 of the podcast. This will give us the present value of all the future free cash flows generated by the business. The sum of these free cash flow figures is the company’s Intrinsic Value. We discussed Free Cash Flow in further detail in episode 7 of the podcast.
The Discounted Cash Flow formula comprises two parts; the first part is used to calculate the Intrinsic Value of a business during what is generally referred to as the High Growth Period, where the company may have higher but potentially inconsistent free cash flow growth rates. This period is usually calculated to no more than 10 years. The second part is used for the Terminal or Stable Growth Period of the company. This is generally a more conservative estimate of a consistent rate of growth that can be expected for the remaining life of the company. A stable growth rate at or just above inflation is usually acceptable, between 2% - 5%. We discuss growth and how to calculate it in more detail in episode 8 of the podcast.
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