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Stocks 404: Putting Discounted Cash Flow into Action

Introduction to Putting Discounted Cash Flow into Action Determining Fair Value, Steps 1 and 2: Project Free Cash Flow and Determine a Discount Rate Determining Fair Value, Steps 3-5: Discount Projected Free Cash Flows to Present, Calculate Discounted Perpetuity Value, and Add It All Up Summary of Putting Discounted Cash Flow into Action
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Introduction to Putting Discounted Cash Flow into Action

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In this course we will work through an example of how to determine the discounted cash flow of a company. It is fairly math-heavy.

What you will learn

  • Determining Fair Value, Steps 1 and 2: Project Free Cash Flow and Determine a Discount Rate
  • Determining Fair Value, Steps 3-5: Discount Projected Free Cash Flows to Present, Calculate Discounted Perpetuity Value, and Add It All Up

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Introduction to Putting Discounted Cash Flow into Action

Let's dig into how to determine fair values for stocks. In this lesson, we'll walk you through a step-by-step sample discounted cash flow (DCF) model that uses the "free cash flow to equity" method. Here are the main steps to generating a per-share fair value estimate with this method:

  1. Project free cash flow for the forecast period.
  2. Determine a discount rate.
  3. Discount the projected free cash flows to the present, and sum.
  4. Calculate the perpetuity value and discount it to the present.
  5. Add the values from Steps 3 and 4, and divide the sum by shares outstanding.