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&#39;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&#39;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 &quot;profits + depreciation - investment.&quot; Calculation of Free Cash Flow Professor Copeland (1990) described the calculation of free cash flow: &quot;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&#39;s capital, all suppliers, including Zhaiquan Ren and shareholders. &quot; 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 changes -------------------------------------------------- ---- = 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 bearish) 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&#39;s operations have in-depth understanding of industry characteristics. Consider the company&#39;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&#39;s value. The accuracy of the model by the input of large (can be used for sensitivity analysis of remedies). 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 expenditures. 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 assets, 3. To achieve long-term assets through mergers and acquisitions. Among them, the subject of &quot;long-term disposal of assets in cash to purchase or cash back&quot; capital expenditures. The current cash flow statement in the &quot;cash flow from investing activities&quot; section, has shown the &quot;acquisition or construction of fixed, intangible and other long-term assets to pay the cash&quot; and &quot;disposal of fixed assets and intangible and other long-term recovery Net cash. &quot; 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 &quot;net output&quot; to form &quot;free cash flow,&quot; &quot;free cash flow&quot; to some extent determine the size of a company&#39;s survival. Long-term output of a business can not be &quot;free cash flow&quot;, it will eventually run out of all the original investors to provide capital, and will go bankrupt. 1. &quot;Free cash flow,&quot; abundant, the enterprise can use &quot;free cash&quot; to pay interest on repayment of principal, dividends or buy back stock and so on. 2. &quot;Free cash flow&quot; 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 &quot;free cash&quot; 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 &quot;拆东墙 补西墙&quot; (also old debt by new debt, equity or refinance) to maintain business operations. When no &quot;east wall&quot; removable, the enterprise fund strand breaks, the end result can only seek to be acquired or filed for bankruptcy reorganization.