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Discounted Cashflow

A company's future cash flows are discounted back to the present to derive a valuation for the company in question. The DCF Model is certainly not a perfect valuation tool, but it can help give an idea of what a company is worth. The user should also keep in mind that the Intrinsic Value that is produced is only as good as the numbers put into the model.

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SWARAJKK
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77 views

Discounted Cashflow

A company's future cash flows are discounted back to the present to derive a valuation for the company in question. The DCF Model is certainly not a perfect valuation tool, but it can help give an idea of what a company is worth. The user should also keep in mind that the Intrinsic Value that is produced is only as good as the numbers put into the model.

Uploaded by

SWARAJKK
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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A special note of thanks goes to John Kish, Devon

FocusInvestor.com: The Focused Few Everhart, Futile France, and Kuang-Yu Liu for
their assistance on this project.
Version 3.0
Decent overview of the workings of a DCF Model click here

Introduction to the FocusInvestor.com Discounted Cash Flow Excel Calculator


One method an investor can use to determine the approximate value of a company involves conducting a discounted cash flow analysis.
An example of a series of assumptions an investor could use to calculate a companies intrinsic value under the three-stage DCF, for example, is listed below:

1: an initial cash flow of $10,000


2: a discount rate of 15% (the user should insert his required return here)
3: cash flows grow at a 14% rate for the first 5 years, a 10% rate for the next 5 years, and a 5% rate for the final 5 year period
4: the investor uses a terminal growth rate of 3%
5: the company has 10,000 shares outstanding and pays no dividends.

Boxes that are highlighted in black throughout the spreadsheets are where users can plug in their own assumptions

Discounted cash flow (DCF) As the name implies, a companies future cash flows are discounted back to the present to derive a valuation for the company in
question. The DCF Model is certainly not a perfect valuation tool (as it is very difficult to predict what a company will grow its cash flows at), but it can provide
one estimate of value that, when combined with all the other components of a users research on a company, can help give an idea of what a company is
worth. The user should also keep in mind that the Intrinsic Value that is produced is only as good as the numbers put into the model. If you assume
unrealistic growth rates (or terminal value) you will get an unrealistic intrinsic value result. The investor should think of the Intrinsic Value figure given in this
light: you need to pay the price given, or lower, in order to achieve a given return (i.e. the discount rate) on your investment if your assumptions are correct.

Limitations of my excel DCF Models: You can only use 5 year time periods unless you modify the spreadsheet. I will continue to work on this issue.

Terminal Value: The PV of the all the companies future cash flows.

Terminal Value Growth Rate: The rate that you expect the company to indefinitely grow its cash flows by.

Discount Rate: The investors required rate of return. NOTE: (If your growth rate is higher than your discount rate, the model will not function properly)

Note: This is a beta copy and as such may have some bugs. If any are found please email [email protected] so they can be corrected.
FocusInvestor.com: The Focused Few

Initial Cash Flow: $15,000

Growth Rate: 10%

Discount Rate: 15%

Shares Outstanding: 10000

Present Value of All Cash Flows:$330,000

Intrinsic Value: $33.00


FocusInvestor.com: The Focused Few

Cash Flow From Operation


Initial Cash Flow: $774,039,000

Year Range: 1-5 6-10


Growth Rate: 7% 5%

Terminal Growth Rate: 1% Discount Rate: 10%

Shares Outstanding: 478564000 Margin of Safety: 25%


Debt Level: ###

Year Flows Growth Value


1 828221730 7% $752,928,845
2 886197251 7% $732,394,422
3 948231059 7% $712,420,029
4 1014607233 7% $692,990,392 ###
5 1085629739 7% $674,090,654 ###
6 1139911226 5% $643,450,170
7 1196906787 5% $614,202,435
8 1256752127 5% $586,284,142
9 1319589733 5% $559,634,863
10 1385569220 5% $534,196,915

Terminal Year ### Scenario LikelihoodIntrinsic Value of Scenario


Scenario 1: 75% $41.60
PV of Year 1-10 Cash Flows: $6,502,592,867 Scenario 2: 15% $35.00
Scenario 3: 5% $20.00
Terminal Value: $5,994,876,487 Scenario 4: 5% $18.00
100%
Total PV of Cash Flows: ###

Number of Shares: 478564000

Intrinsic Value (IV): $23.28

Margin of Safety IV: $17.46

Percentage of IV that derives


from the Terminal Value: 48%
FocusInvestor.com: The Focused Few

Initial Cash Flow: $44,185,000

Years: 1-5 6-10 11-15


Growth Rate: 15% 13% 15%

Terminal Growth Rate: 1% Discount Rate: 12%

Shares Outstanding: 29200000 Margin of Safety: 30%


Debt Level: $225,000,000

Year Flows Growth Value


1 50812750 15% $45,368,527
2 58434663 15% $46,583,755
3 67199862 15% $47,831,534
4 77279841 15% $49,112,736
5 88871817 15% $50,428,256
6 100425154 13% $50,878,508
7 113480424 13% $51,332,781
8 128232879 13% $51,791,109
9 144903153 13% $52,253,530
10 163740563 13% $52,720,079
11 188301647 15% $54,132,224
12 216546894 15% $55,582,194
13 249028928 15% $57,071,003
14 286383268 15% $58,599,691
15 329340758 15% $60,169,325

Terminal Year $332,634,165 Scenario LikelihoodIntrinsic Value of Scenario


Scenario 1: 60% $19.85
PV of Year 1-15 Cash Flows: $783,855,251 Scenario 2: 25% $10.00
Scenario 3: 10% $7.50
Terminal Value: $552,463,803 Scenario 4: 5% $3.00
100%
Total PV of Cash Flows: $1,336,319,054

Number of Shares: 29200000

Intrinsic Value: $38.06

Margin of Safety IV: $26.64

Percentage of IV that derives 41%


from the Terminal Value:
FocusInvestor.com: The Focused Few
(in thousands)
Assumptions:
Sales Growth (Years 1-5): 15.0%
Sales Growth (Years 6-10): 13.0%
Terminal Value Growth Rate: 1.0%
Tax Rate: 30.0%
Operating Profit Margins: 18.7%
Incremental Fixed Capital Investment: 19.0%
Incremental Growth in Working Capital: 22.5%
Discount Rate: 8.0%
Total Debt: 330224
Shares Outstanding: 147438
Margin of Safety: 25.0%

(in thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Sales 1706602 1962592 2256981 2595528 2984858 3372889 3811365 4306842 4866731 5499407
Operating Profit 319135 367005 422055 485364 558168 630730 712725 805379 910079 1028389
Less: Cash Tax Rate 95740 110101 126617 145609 167451 189219 213818 241614 273024 308517
NOPAT 223394 256903 295439 339755 390718 441511 498908 563766 637055 719872

Incremental Fixed-Capital Investment 60636 69731 80191 92219 106052 119839 135418 153022 172915 195394
Incremental Working-Capital Investment 71805 82576 94962 109207 125588 141914 160363 181210 204768 231388
132441 152307 175153 201426 231640 261753 295781 334232 377683 426781

Free Cash Flow 90953 104596 120286 138329 159078 179758 203127 229533 259372 293091
Present Value of FCF 84216 89675 95487 101676 108266 113278 118522 124010 129751 135758
Cumulative Present Value of FCF 1100638
Terminal Year 296022

Terminal Value 1958791

Total PV of Cash Flows 3059429

Add:
Cash and Cash Equivalents 156197

Less:
Total Debt 330224
Stock Options
Pension fund underfunding*

Intrinsic Value 2885402

Intrinsic Value Per Share $19.57

Margin of Safety Intrinsic Value $14.68

*(Included in total debt)


FocusInvestor.com: The Focused Few

2 Stage DCF Scenario Analysis

Scenario Likelihood
Intrinsic ValueExpected Value
Scenario 1 75% $41.60 $31.20
Scenario 2 15% $35.00 $5.25
Scenario 3 5% $20.00 $1.00
Scenario 4 5% $18.00 $0.90
Totals: 100% $38.35

Expected Instrinsic Value: $38.35

3 Stage DCF Scenario Analysis

Scenario Likelihood
Intrinsic ValueExpected Value
Scenario 1 60% $19.85 $11.91
Scenario 2 25% $10.00 $2.50
Scenario 3 10% $7.50 $0.75
Scenario 4 5% $3.00 $0.15
Totals: 100% $15.31

Expected Instrinsic Value: $15.31

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