Motley Fool Money How to Value a Company with the Discounted Cash Flow Model
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Apr 16, 2022 Dive into the world of company valuation with insights on the discounted cash flow model. Learn how to pick an appropriate discount rate and the key distinction between fair and intrinsic value. Discover methods for projecting future cash flows and how they impact investment decisions. This discussion provides practical steps for assessing whether you're getting a good deal on stocks, paving the way for smarter investments.
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Intrinsic Value Definition
- Intrinsic value is the present value of a company's future free cash flow.
- This core concept in corporate finance uses present value because a dollar today is worth more than a dollar tomorrow.
DCF Factors
- Discounted Cash Flow (DCF) models consider the size, timing, and riskiness of free cash flows.
- Larger, sooner, and less risky cash flows increase a company's intrinsic value.
Discount Rate and Risk
- Discount rate reflects the riskiness of an investment and acts as your required rate of return.
- Higher discount rates mean higher risk and a lower present value, while lower rates mean lower risk and higher present value.