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Pros And Cons Of Discounted Cash Flow Valuation

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Discounted Cash Flow Valuation
If you are planning to purchase stocks from the capital market, your first move is to evaluate those stocks which undervalued from the current market price. This approach would bring success in long term. As for initial stage for investment in stocks, one would be buying relatively cheap stock, because it doesn’t make sense to buy expensive stock at first. When I am saying cheap stock, it means I am referring the stock price compared with the fair value of the company
If stock market is efficient and all market participant have access to all important information about the company and would evaluate the information in the proper manner. But this would not happen in the real world scenario. Nobody really knows …show more content…

One general method of calculating fair company value is by comparing the company with key players in the same sector or industry. A more advanced approach is to use discounted cash flow valuation method. Both approaches have some pros and cons. We will focus on the latest method in this article next. The main principle of discounted cash flow or DCF is to predict how much money the company will generate for investors in the future and discount all the future cash flows on the current date to get its intrinsic value. DCF valuation can be processed in the following …show more content…

This can be a tough a part of the analysis. Try to suppose all possible aspects influencing company revenues, like future product and services, amendment in market share, expected changes in evaluation policy, etc. you must affect realistic, optimistic and depressed outcomes. The ultimate result of this step is to get sales revenues projections for years to come.
Free Cash Flow
Free Cash Flow is the cash left to the company after operating expenses are paid. This is what increase the value to company shareholders and can be used for dividend payout, business expansion, research and development, and similar. Projected FCF per year is calculated as sales revenue minus operating costs, taxes, net investment and net changes in working capital. It is not the purpose of this essay to get into more details about specific accounting categories, but let's just say that you can find all these figures for recent years in different financial statements of the company.
Discount

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