Financial Modeling in Excel For Dummies, 2nd Edition

Chapter 11

Building a Discounted Cash Flow Valuation

IN THIS CHAPTER

Getting acquainted with discounted cash flow models

Calculating free cash flow to firm

Calculating weighted average cost of capital

Finding terminal value

Discounting cash flows and valuation

The discounted cash flow (DCF) model is one of the most commonly-used methods of finding the value of a company or any other cash flowing asset. In fact, many other methods of valuation — such as cash flow multiples and the leveraged buyout model — are proxies or derivatives of the DCF model. Normally, modelers use the DCF method when trying to decide what the value of an asset is. For example, you may be considering purchasing a company or a large piece of equipment and want to know what the value of the asset is for you.

DCF calculations are normally an add-on to an existing, working financial model, but in order to use the DCF method to arrive at a value for the asset, you need to make sure that the model contains the following ...