The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition

Conclusion

A company’s intrinsic value reflects its fundamentals. The primary tool for estimating intrinsic value is the discounted cash flow model. We started by looking at the contrast between valuing the equity in a business and valuing the entire business, and then we moved on to the four inputs we need for the model. The cash flows to equity investors can be defined strictly as dividends, more expansively as dividends augmented with stock buybacks, and most generally as free cash flows to equity (potential dividends). The cash flow to the firm is the cumulative cash flow to both equity investors and lenders and thus is a predebt cash flow. The discount rates we apply have to be consistent with the cash flow definition, with the cost of ...