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.
l If the analysis is being done in real terms (rather than nominal terms) use a real riskfree rate, which can be obtained in one of two ways – – from an inflation-indexed government bond, if one exists – set equal, approximately, to the long term real growth rate of the economy in which the valuation is being done.
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