馃攳
Discounted Cash Flow (DCF) - Model, Analysis, Formula with Step by Step Calculation - YouTube
Channel: WallStreetMojo
[11]
hello everyone hi welcome to the channel
of WallStreetmojo watch the video
[16]
till the end and also if you are new to
this channel then you can subscribe us
[20]
by clicking the bell ican friends today we
are going to learn a topic that is on
[24]
discounted cash flow analysis this is
like a universal method for you know
[29]
valuation of any company this is a
universal method remember one here you
[34]
have alibaba's IPO discounted a
discounted cash flow techniques and some
[40]
of the valuation that has been done this
is the you know a screenshot of the same
[46]
now what is discounted cash flow see in
simple word discounted cash flow
[50]
analysis is the process of basically
evaluating the attractiveness of the
[55]
investment opportunity in the future at
present you know asset discounted cash
[60]
flow valuation analysis they try to
calculate the value of the company which
[64]
they will determined over here today
based on the forecast of how much the
[68]
money company is going to make in the
future so in other words you can say
[72]
that DCF analysis uses the forecasted
method forecasted cash flow of the
[76]
company and discounted discount them
back as to arrive at the present value
[81]
estimate which forms the basis of the
potential investment now so let's start
[87]
with this how these step-by-step process
goes the step by step discounted cash
[92]
flow process goes something like this it
is a seven steps of flow first you need
[97]
to project the cash flow then you apply
the FCFF formula on the same you need
[103]
to apply the discounting rate to or to
discount the free cash flow of the firms
[108]
and then determine the terminal value
based on the last cash flow determine
[113]
the present value of all the free cash
flows to the firm and the terminal
[116]
values present value you need to make
some adjustment and final is these
[120]
sensitivity analysis this is the seven
step or for discounted cash flow
[125]
analysis right projection of the
financial statement then calculating the
[131]
free cash flow to the form then third is
calculating the discount rate then the
[136]
terminal value present value calculation
any adjustments and final is the
[142]
these sensitivity analysis will start
with the first thing as that needs is
[146]
the attention while applying the
discounted cash flow is the projection
[149]
portion now that therefore you know you
can see that cash flow analysis to
[155]
determine the forecasting period of firm
unlike human beings have infinite lives
[158]
therefore the analyst have to decide how
far they should project its cash flow in
[162]
the future but the analysis forecast
period depends on these stages of the
[166]
company's operating and such as early to
the business high growth rate stable
[170]
growth rate and perpetuity growth rate
based on which it works so you need to
[175]
project things over here the forecasting
period plays a very critical role because
[179]
the small firms grow faster than the big
firms and so the analysts don't expect
[185]
the firms to have infinite lives due to
the fact that these small forms are more
[189]
open to the acquisition and bankruptcy
than the larger form
[193]
what is the first thing that you need to
do you need to project the income
[196]
statement okay then you need to project
the balance sheet and then the CFS we'll
[202]
start with income statement you know
here the analysts basically look over
[205]
here for sales or revenue growth over
the next five years considering that the
[210]
company
you can see that we'll be producing
[214]
excess and return in the next 5 years
okay after that the analysts calculate
[218]
the after-tax operating profits and at
the same time you know estimate the
[222]
expected capital expenditure and
increase in any net working capital over
[225]
the forecasted period so you can say
that there is another approach called
[230]
internal growth rate that comprises of
return on the equity and the growth rate
[235]
and on the retain earnings and over
there we take the combined growth rate
[240]
comprising of both the top and the
bottom growth rates then we analyze the
[244]
balance sheet now forecasting the
financial statement is not done in the
[247]
sequence in the discounted cash flow all
three statements are basically you can
[251]
say interconnected to each other and you
will find that while you forecast from the
[255]
income statement you may have to move to
balance sheet
[260]
and then to the basically to the cash
flow etc great no the next thing is the
[266]
projecting to the cash flow statement
it's it's not necessary for you to
[270]
project each and every item on the cash
flow statement some time it becomes
[273]
practically impossible to do so due to
the lack of data and the only necessary
[277]
item from discounted cash flow point of
view is this the forecast at one the
[282]
next process that you need to go for is
the calculate the FCFF to the firm now
[288]
the second step in the cash flow
analysis is to calculate the FCFF now
[292]
before we estimate the field FCFF we
have to first understand what FCFF is
[296]
which is left out after the company pays
all the operating expenditure and
[304]
required capital expenditure so the
company uses this free cash flow to
[307]
enhance the growth such as developing new products establishing new facilities and
[313]
paying dividends to its shareholders or
initiating some share buybacks so free
[317]
cash flow basically represents or
reflects
[321]
or reflects the firms ability to
generate
[325]
the money you can see out of the
business trending the financials
[329]
flexibility and that
it can be potentially used to pay its
[333]
outstanding Net debt and increase the value
of the shares
[337]
then the next thing that comes into
picture is the calculation of the
[344]
discounting rate right this is the next
thing know in this third step what we
[353]
are going to do a number of methods are
being used to calculate the discounting
[356]
rate but the most appropriate method to
determine the discount rate is by using
[361]
the concept of WACC you have to keep in
mind that you have to take the right
[366]
figures of the equity after-tax cause
cost of debt as a difference you know
[370]
just 2 or 3% is your point
in the cost of capital will make a vast
[374]
difference in the fair value of the
company so take care on this mode do you
[378]
have KE you have to calculate KD and
with the help of that you have to take
[382]
the weights and calculate the WACC which is going to be a discount rate fourth
[387]
you will need to calculate the terminal
value the what exactly's terminal value
[393]
which is the fourth step in the
discounted cash flow to calculate the
[396]
terminal value we have already
calculated the critical components up
[400]
till now in the DCF analysis except the
terminal value now therefore will now
[406]
calculate the terminal value followed by
the calculation of the discounted cash
[409]
flow analysis there are several ways to
do one the best way is to go for the
[413]
Gordon's growth model to value the
company and you know it's the it's
[417]
formula is is like quite simple it's
like the final year you know cash flow
[422]
okay finally a cash flow and you will
multiply this one plus the infinite
[429]
growth rate okay and you will divide
this whole thing by the discount rate
[436]
that is your WACC okay minus G this is
the best way to calculate your terminal
[441]
value the fifth step in this is going to
be of the DCF is the present value
[448]
calculation now in case of the present
value calculation of the fifth step find
[454]
the present value of the projected cash
flow using the NPV formula that is a net
[459]
present value formula or you can go for
X NPV formulas now project the cash
[466]
flows of the forms are divided into two
part one is called the explicit period
[470]
in this
and another is the period after the
[478]
exploited explicit period that is posted
to our 2020 II that is the post post
[483]
period that so you will have to
calculate both explicit period and the
[488]
forecasted period and you need to do the
present value calculations the final is
[493]
the adjustment adjustments that that you
are supposed to make this is a six step
[498]
in the discounted cash flow to make
adjustments to your evaluation it just
[503]
went through the discounted cash flow is
done for all the non you can say for
[507]
non-core assets and liabilities that has not been accounted for in the free cash flow
[511]
projections and valuations may be
adjusted by adding any unusual assets or
[515]
subtracting liabilities to find it just
it fair equity value what you need to do
[521]
is you need to just adjust your assets
and liability like for example non-core
[525]
assets and liabilities not accounted for
in cash flow projections the enterprise
[529]
value that is the EV may be just may
need to be adjusted by adding any other
[535]
unusual assets or subtracting
liabilities to reflect the company's
[538]
fair value right and the final step in
the DCF analysis is the sensitivity
[547]
analysis the seven step right it is
important to test your DCF model with
[553]
changes in the Assumption this is very
important if there are any changes in
[558]
the assumptions the two of the most
important assumptions that gives a major
[561]
impact of the evaluations are first the
in finite growth rate infinite G and
[568]
then there is a changes in WACC we can
easily do with the sensitivity analysis
[577]
in Excel you know that's that's really
very easy thing to do so now we have
[582]
come to know that the discounted cash
flow analysis helps to calculate the
[586]
value of the company today's based on
the future cash flow it is because the
[590]
value of the company depends upon the
sum of the total cash flow that the
[592]
company produces in the future however
we have to discount the future cash flow
[598]
to arrive to arrive at
the present value of this cash flows so
[604]
that's it for this particular topic if
you have learned and enjoyed watching
[608]
this video please like and comment on
this video and subscribe to our channel
[612]
for the latest updates thank you are
Most Recent Videos:
You can go back to the homepage right here: Homepage