Calculate intrinsic value of stocks using discounted cash flow analysis
Discounted Cash Flow (DCF) analysis is a valuation technique used to estimate the intrinsic value of a stock by calculating the present value of its future cash flows. This method is based on the principle that the value of a company is equal to the present value of its future cash flows.
The DCF model involves forecasting the company's future cash flows, determining a discount rate, and calculating the present value of these cash flows. The discount rate is typically the company's weighted average cost of capital (WACC).
The DCF formula is: Value = Σ (CFt / (1 + r)^t), where CFt is the cash flow at time t, r is the discount rate, and t is the time period. This calculation is performed for each future cash flow, and the results are summed to obtain the total present value.
DCF analysis is widely used by investors and analysts to determine the intrinsic value of a stock and compare it with its current market price.
| Year | Cash Flow | Present Value |
|---|---|---|
| 1 | $100 | $90.91 |
| 2 | $120 | $99.17 |