Discounted Cash Flow (DCF) Method with Long Term Growth
The Discounted Cash Flow (DCF) with Long Term Growth method estimates a company’s future cash flows and discounts them back to present value based on risk factors. It assumes cash flows will continue growing at a steady long-term rate. This method provides a comprehensive valuation based on projected financials.
Discounted Cash Flow (DCF) Method with Long Term Growth
Estimating Future Cash Flows
- We project the company’s financials for a 5 year period to forecast future free cash flows
- Key projections include revenue growth, operating costs, capital expenditures, depreciation and amortization, changes in working capital
- Projections are based on historical financials, company plans, and industry benchmarks
Discounting Cash Flows
- Cash flows are discounted to present value using the discount rate
- Discount rate accounts for time value of money and investment risks
- We calculate the discount rate using the CAPM model based on risk-free rate, beta, market risk premium
- Inputs are customized based on company country, industry, stage, profitability
Calculating Terminal Value
- Terminal value represents the value of cash flows beyond the forecast period.
- It is calculated using the perpetuity growth model.
- The model assumes cash flows will grow at a steady rate (between 0.1% – 2.5%) forever.
- Growth rate is based on industry averages and GDP growth benchmarks.
Determining Total Valuation
Total valuation = Sum of discounted projected cash flows + Discounted terminal value
Provides market value of the company based on financial projections and growth prospects
