This chapter focuses on DCF valuation, including the following topics:
What is the Discounted Cash Flow method?
When should it be used?
What are the advantages and disadvantages of the DCF method?
How is a DCF valuation structured?
We tried to cover not only the why i.e. what are the advantages of the Discounted Cash Flow methodology but also the how i.e. in practice, what steps are required to build a credible DCF valuation.
2. leads to a significant change in valuation only causes concern when those responsible for the valuation cannot back up their assumptions or build credibility into
the numbers. The difficulty in the assumptions of DCF is not related to the method itself but rather to the actual assumptions being used.
Those using the DCF method for investment analysis, decision-making or as a backup tool for negotiation should focus on carefully supportingtheir
work and understanding the valuation’s sensitivity to key assumptions. Once these critical aspects are covered, the analyst will find that the valuation discussion
is enhanced within the team and with third parties.
Equation 1below illustrates the formula used for calculations with the DCF method.
Equation 1. DCF Formula
2.2 When should the DCF Method be used?
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