Walk me through a DCF model.

Question

Accepted Answer

A DCF model estimates the value of an investment based on its expected future cash flows.

1. Forecast Free Cash Flows (FCF): Estimate cash flows for the next 5-10 years. Example: Project revenues, expenses, and taxes.
2. Calculate Terminal Value: Estimate the value beyond the forecast period using methods like Gordon Growth Model. Example: FCF in year 5 * (1 + growth rate) / (discount rate - growth rate).
3. Discount Cash Flows: Use a discount rate (WACC) to bring future cash flows to present value. Example: FCF in year 1 / (1 + WACC)^1.
4. Sum Present Values: Add the present values of forecasted cash flows and terminal value to get the total enterprise value.
5. Adjust for Debt and Cash: Subtract debt and add cash to find equity value. Example: Enterprise value - debt + cash = equity value.

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