Walk me through a DCF

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In a DCF analysis, you value a company with the Present Value of its future Free Cash Flows plus the Present Value of its Terminal Value.

  • First, Project a company’s Free Cash Flow over a period of time (usually 5-10 years)
  • Calculate the company’s Discount Rate
  • Discount the cash flows back to their Present Value and sum them up
  • Calculate the company’s Terminal value
  • Discount the Terminal Value to its Present Value
  • Add the discounted Free Cash Flows to the discounted Terminal Value