Join Jim Stice for an in-depth discussion in this video Discounted cash flow valuation, part of Finance Foundations: Business Valuation.
- In theory, a company should be worth…the discounted value of the future cash flows…to be generated by the company.…A way to look at this directly…is to compute the discounted present value…of free cash flow.…In this context, free cash flow is defined as follows.…Cash from operating activities…minus cash paid for capital expenditures,…that's free cash flow.…Free cash flow from McDonald's for 2009,…2010, and 2011 is computed as follows.…First you've got the cash from operating activities…in each year, then you've got the capital expenditures…in each year, and that gives the free cash flow.…
2009, it's 3.8 billion dollars.…2010, 4.2 billion dollars, and 2011,…a little bit over 4.4 billion dollars,…you can see that free cash flow going up each year.…In order to use this discounted free cash flow model,…we need to make forecasts about the following.…First, future growth rates in free cash flow.…Next, the forecasting horizon,…and finally, what happens in the terminal year.…So, future growth rates.…Free cash flow increased by 10.7%…
Make sure to check out the Stice brothers' other accounting and finance courses to understand the other economic factors that impact your business.
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- Using market, cost, and income approaches to business valuation
- Valuing homes
- Valuing companies by multiples
- Using price-to-sales ratios to value companies
- Using discounted cash-flow analysis to estimate value
- Valuing McDonald's as a case study