Discounted Cash Flow Valuation
In discounted cash flow (DCF) valuation, an asset’s value is the present value of the expected cash flows on the asset, discounted back at a rate that reflects the riskiness of these cash flows. This section looks at the foundations of the approach and some of the preliminary details of how we estimate its inputs.
The Essence of DCF Valuation
We buy most assets because we expect them to generate cash flows for us in the future. In discounted cash flow valuation, we begin with a simple proposition. The value of an asset is not what someone perceives it to be worth; it is a function of the expected cash flows on that asset. Put simply, assets with high and predictable cash flows should have higher values than assets ...