Discounted Cash Flow (DCF) Software to Calculate Stock Value
Discounted Cash Flow (DCF) is a method of valuation that attempts to assess the attractiveness of an investment opportunity (e.g. a stock) by summing the future value of cash flows and discounting that sum to a present value. When evaluating investment in a stock, the company’s free cash flow projections are used for this analysis. Discounted cash flow analysis can be an effective tool for stock investors as it forces the investor to consider future performance projections when making investment decisions. If the stock value arrived at through DCF analysis is higher than the current share price, the stock may present a good investment opportunity.
What is a Company’s Free Cash Flow?
Free Cash Flow represents the cash a company has generated for shareholders after it has paid expenses. Free cash flow levels are important for investors to monitor because it’s free cash flow that enables the company to pursue growth opportunities and enhance value to its shareholders. While a company’s earnings may be high, an examination of free cash flow is required to know how much money the company has actually generated over a given time period.
How Do You Choose a Discount Rate?
After you have estimated the free cash flow levels for the company, you need to apply a discount rate to bring these cash flows to a value in today’s dollars. You do that by applying a discount rate and there are several methods for calculating this:
Weighted Average Cost of Capital (WACC): The WACC is a method of calculating the company’s cost of capital under which each category of capital is assigned an appropriate weight.
Cost of Equity (COE): The cost of equity represents the level of return stockholders require. The COE calculates the compensation that investors demand as reward for owning the asset and the associated risk of ownership.
Click here for more information about choosing a discount rate
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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