CHAPTER 3

Introducing Classic DCF Analysis

Life must be understood backwards. But…it must be lived forwards.

—Søren Kierkegaard, Journals, 1843

INTRODUCTION

The value of any company, while foretold by the past, exists in the future: it must be “lived forwards.” But how? The short answer is DCF. Business value is ultimately expressed in monetary form (i.e., cash now or later), so cash and value are inseparable.

According to the DCF method of company valuation, an analyst can make a reasonable prediction of how much unencumbered cash the company will generate within some significant future period. This requires calculating the company’s future net operating cash flow and discounting it to the present. This method will come up sooner or later when ...

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