DCF valuation model

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					DCF valuation model
DCF valuation model
Posted :2009-6-17 9:07:41 author: Fei-fei on: Sohu blog
Experience: DCF more rigorous analytical methods, but involves a lot of produce,
poor choice of words, will miss is as good, hack away. In contrast, the relatively
stable income (income generation), the cost is relatively stable (mainly depreciation)
of water more suitable for valuation of such companies.

DCF / DiscountCashFlow / discounted cash flow model)

(1) free cash flow (FreeCashFlow) definition

Free cash flow is a financial method used to measure the company's actual
holdings of cash to reward shareholders. Means without endangering the survival and
development company available for distribution to shareholders under the premise
(and creditors) the maximum amount of cash.

Free cash flow in operating cash flow model based on the consideration of capital
expenditure and dividend payments. Although you might think that payout is not
required, but this expenditure is expected by shareholders, but also a cash payment.
Free cash flow equals operating cash.

Free cash flow that the company's discretionary cash. If the free cash flow
rich, the company can repay the debt, develop new products, buy back stock, increase
dividend payments. Meanwhile, abundant free cash flow also allows the company to
become acquisition targets.

Free cash flow Free cash flow can be divided into the overall business and corporate
equity free cash flow. Free cash flow refers to the whole enterprise after deducting all
operating expenses, after the investment needs and tax, before debt remaining in cash
flow; equity free cash flow is net of all expenses, tax payments, investment needs and
debt service expenditures After the remaining cash flow. Free cash flow is used to
calculate the overall value of enterprise as a whole, including the equity value and
debt value; equity free cash flow is used to calculate the value of corporate equity.
Equity free cash flow can be simply expressed as "profits + depreciation -

Calculation of Free Cash Flow

Professor Copeland (1990) described the calculation of free cash flow:
"Free cash flow equals after-tax net operating profit (excluding interest
payments the company will soon operating profit after deducting taxes paid the
amount of income taxes) plus depreciation and amortization and other non-cash
charges, minus the additional working capital and property, plant equipment and other
assets of the investment. It is the company generated total after-tax cash flow can be
provided to the company's capital, all suppliers, including Zhaiquan Ren
and shareholders. "

Free cash flow = (after-tax net operating profit + depreciation and amortization) of a
(capital expenditures + increase in working capital)

Net operating profit - taxes

-------------------------------------------------- ----

= NOPAT [net operating profit after tax] - net investment - net working capital

-------------------------------------------------- ----

= Free Cash Flow

The form of free cash flow is

With the definition of free cash flow derived in two ways: equity free cash flow
(FCFE, FreeCashFlowofEquity) and the company free cash flow (FCFF,
FreeCashFlowofFirm), FCFE is the company to pay all operating costs, re-investment
expenditures, income taxes and net debt payments (ie, interest, principal payments
reduce the net issuance of new debt) to shareholders after distribution of surplus cash
flow, which is calculated as follows:
FCFE = Net income 10 A capital expenditure, depreciation, working capital additional
principal amount of a debt repayment + new issue of debt

FCFF is the company to pay all operating costs for the necessary investment in fixed
assets and operating assets can be distributed to all investors in the after-tax cash flow.
FCFF is the company all claims, including common shareholders, preferred
shareholders and creditors, the sum of the cash flow, which is calculated as follows:

FCFF = EBIT x (1 - tax rate) + depreciation of a capital expenditure of an additional
working capital

(2) FCFF model (Freecashflowforthefirmfirm / company free cash flow model)

DDM model

V representative of the intrinsic value of common stock, Dt s t for the common stock
of the dividends paid or the dividend, r is the discount rate
Different assumptions on dividend growth, dividend discount model can be divided
into: a zero-growth model, constant growth model (Gordon growth model), two-stage
dividend growth model (H model), three-stage dividend growth model and multiple
forms of growth models .

The most basic model; dividend discount is the most stringent definition of intrinsic
value; DCF DDM method borrows heavily from some of the logic and calculations
(based on the assumption that the same / the same restrictions).

DCF model

2.DCF/DiscountCashFlow / discounted cash flow model) DCF valuation method is
the most rigorous of the company and stock valuation method, in principle, the model
is applicable to any type of company.

Free cash dividend alternative, more scientific, less vulnerable to human impact.

When all the equity free cash flow for dividend payments, FCFE model and DDM
model is no different; But in general, dividends are not the same as equity free cash
flow, high and sometimes low, for four reasons:

Stability requirements (uncertain future ability to pay high dividends);

Future investment needs (estimated future capital expenditure / financing for the
inconvenience and expensive);

Tax factor (a progressive personal income tax system is high);

Signal characteristics (dividend increase / prospects; dividends down / outlook

Advantages and disadvantages of DCF model

Advantages: recommendations than other commonly used models include a more
complete assessment of the evaluation model, the framework of the most rigorous and
relatively complex evaluation model. The amount of information required more
comprehensive perspective, take into account the long-term development of the
company. A more detailed forecast a longer time, and to consider more variables, such
as earnings growth, capital costs, can provide the appropriate model of thinking.

Disadvantages: takes a long time to be the case with the company's
operations have in-depth understanding of industry characteristics. Consider the
company's future earnings, growth and risk of a complete evaluation model,
but the data are highly subjective estimates and uncertainties. Complex models, may
be difficult to estimate because the data can not be used, even if we manage to
estimate the error in the data set into a perfect model, can not get correct results.
Small changes in input may lead to large changes in the company's value.
The accuracy of the model by the input of large (can be used for sensitivity analysis of

China to apply the formula:

Free cash flow company

= Cash flow from operating activities - Net capital expenditure

= Cash flow from operating activities - Net (acquisition or construction of fixed,
intangible and other long-term assets to pay cash - disposal of fixed, intangible and
other long-term assets, net of cash recovered)

Capital expenditure

Capital expenditure: for the purchase of fixed assets (land, plant and equipment)
investment, investment in intangible assets and long-term equity investments and
other capacity expansion, process improvement with long-term benefit of the cash

The form of capital expenditures:

1. Cash purchase or disposal of long-term assets, cash recovered

2. By issuing bonds or shares in the form of non-cash transactions to obtain long-term

3. To achieve long-term assets through mergers and acquisitions.

Among them, the subject of "long-term disposal of assets in cash to
purchase or cash back" capital expenditures.

The current cash flow statement in the "cash flow from investing
activities" section, has shown the "acquisition or construction of
fixed, intangible and other long-term assets to pay the cash" and
"disposal of fixed assets and intangible and other long-term recovery Net
cash. "

Therefore: the acquisition and construction of capital expenditures = fixed, intangible
and other long-term assets to pay cash - disposal of fixed, intangible and other
long-term assets, net of cash recovered

Economic significance of free cash flow

All enterprises operating activities cash "net output" to form
"free cash flow," "free cash flow" to some
extent determine the size of a company's survival. Long-term output of a
business can not be "free cash flow", it will eventually run out
of all the original investors to provide capital, and will go bankrupt.

1. "Free cash flow," abundant, the enterprise can use
"free cash" to pay interest on repayment of principal, dividends
or buy back stock and so on.

2. "Free cash flow" is negative, the company earned with
interest costs are not coming back, but not yet put into operation only use (including
investment) activities, the remaining investors (shareholders, creditors) to provide the
seed capital (assuming also no previous annual "free cash"
surplus) to pay interest, principal payments, distribution of dividends or share
buybacks and so on.

3. When the remainder of the original capital investment to provide enough to pay
interest, principal payments, dividends, the firm can only rely on "拆东墙
补西墙" (also old debt by new debt, equity or refinance) to maintain
business operations. When no "east wall" removable, the
enterprise fund strand breaks, the end result can only seek to be acquired or filed for
bankruptcy reorganization.