Discounted Cash Flow

Overview

A simple model of a company is that a company an organization that generates cash for its investors. From this perspective, the fair value for the firm can be obtained by discounting these cash flows back to the present. (see present value) This simple model has the following two 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

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.