Transcription of Discounted Cash Flow Valuation: The Inputs
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Discounted Cash Flow Valuation: The Inputs
1 Discounted Cash Flow valuation : Discounted Cash Flow valuation : The InputsThe InputsAswath Damodaran2 The Key Inputs in DCF ValuationThe Key Inputs in DCF ValuationlDiscount Rate Cost of Equity, in valuing equity Cost of Capital, in valuing the firmlCash Flows Cash Flows to Equity Cash Flows to FirmlGrowth (to get future cash flows) Growth in Equity Earnings Growth in Firm Earnings (Operating Income)3I. Estimating Discount RatesI. Estimating Discount RatesDCF Valuation4 Estimating Inputs : Discount RatesEstimating Inputs : Discount RateslCritical ingredient in Discounted cashflow valuation . Errors in estimating the discount rate or mismatching cashflows and discount rates can lead to serious errors in valuation .
Measurement of the risk premium l The risk premium is the premium that investors demand for investing in an average risk investment, relative to the riskfree rate. l As a general proposition, this premium should be – greater than zero – increase with the risk aversion of the investors in that market
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