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Discounted cash flow valuation models

Abstract

The discounted cash flow (DCF) valuation models are based on the assumption that the value of any firm is the present value of the expected cash flows. The three basic DCF valuation models are the dividend discount models (DDMs), the free cash flow to equity (FCFE), and the free cash flow to firm (FCFF) models. The value obtained by the DDM model is the intrinsic value of the stock. DDM prices a stock by the sum of its future cash flows discounted by the require rate of return which is the cost of equity.

In FCFE valuation models, the future cash flows to the equity shareholders are discounted by the cost of equity to arrive at value. In firm valuation (FCFF), the future cash flows to the main stakeholders ...

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