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Anonymous

17 Jun 2020

General Investing

What is DCF for determination of stock entry price? How can I go about calculating it?

Came across this in a few websites but dont really understand. Do i have to find out the company cash flow etc. and calculate using a formula?

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Lin Yun Heng

17 Jun 2020

Senior Analyst at Delphi

It can be automatically calculated online. Unless you want to go through the hassle and calculate for each company slowly. You can use sites/apps like SimplyWallSt, their valuation is based on DCF so it can be a place of reference. DCF valuation is only a guideline as prices may or may not hit the intrinsic value, and it will change as companies release their quarterly reports every quarter, based on their cash flow etc.

Lim Qin Da

17 Jun 2020

Finance & Business Analytics at National University of Singapore

Hey Anon!

Discounted cash flow (DCF) is a method of valuation used to determine the value of an investment based on its return in the future–called future cash flows. DCF helps to calculate how much an investment is worth today based on the return in the future. DCF analysis can be applied to investments as well as purchases of assets by company owners.

The DCF formula is more complex than other models. You will have to find out the company cash flows as well as make some estimates.

Present value = CF1 / (1+k) + CF2 / (1+k)2 + ... TCF / (k-g) / (1+k)n-1]

Definition of the terms:

  • CF1: The expected cash flow in year one

  • CF2: The expected cash flow in year two

  • TCF: The “terminal cash flow,” or expected cash flow overall. This is usually an estimate, as calculating anything beyond 5 years or so is guesswork.

  • k: The discount rate, also known as the required rate of return

  • g: The expected growth rate

  • n: The number of years included in the model

Came across these 2 websites that may help you understand more and can give you a deeper understanding into DCF:

Hope this helps!​​​

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