Overview
A simple model of a company is that a company is just an organization that generates cash for its investors. From this perspective, the fair value for the firm can be obtained merely by discounting these cash flows back to the present. (see present value)
Challenges
- Multiple measures of cash flow are available
- Dividends
- Earnings are cash flows to the firm that the owners of the firm are entitled to, regardless of whether they are paid out to them immediately or not.
- Free Cash Flows are cash flows to the firm that the owners of the firm are entitled to, regardless of whether they are paid out to them immediately or not.
- Cash flows are uncertain - this impacts both the forecast of the cash flow used in the discount model, and the discount rate applied.
Types
- Dividend Discount Model
- Free Cash Flows are cash flows to the firm that the owners of the firm are entitled to, regardless of whether they are paid out to them immediately or not.