Discounted Cash Flow (DCF) Valuation Method
Discounted cash flow (DCF) is a valuation method used to estimate an investment's value based on its expected future cash flows.
The discounted cash flow method (DCF) is the favorite valuation framework among academics and practitioners because it relies solely on cash flow in and out of the company.
The DCF implementation needs first to estimate future cash flows. The cash flows are the residual cash flows after meeting all operating expenses, reinvestment needs, and taxes, but before payment to either debt or equity holders.
In the second step, one must calculate the discount rate. A discount rate is the return rate used to discount future cash flows back to their present value. When one calculates a firm's value, the discount rate is the weighted cost of capital (WACC).
Discounted cash flow (DCF) is a valuation method used to estimate an investment's value based on its expected future cash flows
The greatest limitation of the DCF method is that it relies on estimations on future cash flows, which will turn out in retrospect to be incorrect.
The accounting approach of valuation is to assess the cost of replacing each of the assets the firm owns.
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If you liked this blog post, you might also like to read the following blog post: Are Business Valuators Biased? The Case of the Discounted Cash Flow Method?
