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DCF Valuation: Key Components Explained

The document discusses the three pillars of discounted cash flow (DCF) valuation: cash flows, growth, and risk. It explains intrinsic valuation, relative pricing valuation, and real option valuation as different methods of valuation. It emphasizes understanding these valuation methods and their three pillars, and encourages saving the post to revise later and attending an upcoming LinkedIn Live session for questions.

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Rahul Malik
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66 views13 pages

DCF Valuation: Key Components Explained

The document discusses the three pillars of discounted cash flow (DCF) valuation: cash flows, growth, and risk. It explains intrinsic valuation, relative pricing valuation, and real option valuation as different methods of valuation. It emphasizes understanding these valuation methods and their three pillars, and encourages saving the post to revise later and attending an upcoming LinkedIn Live session for questions.

Uploaded by

Rahul Malik
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

-

nation School

--
A
Y MASTERCLASS
I-
E
i

-
3 pillars of DCF
Heylos! ->

welcome to part 2 of
part 30

series on "Valuation Masterclass"

-
this
In part, have thrown
I light
on different methods of valuations
and 3 pillars of Def valuation

If you missed the 1st part-link


is in the post above.

this
-
save
post to Revise again.
-

Fifferent
of valuation
methods

ation
-
-

↓
-

to
1. Intrinsic 2. Relative 3. Real
valuation Pricing option
valuation valuation

est
e
understand each of I them
1. Intrinsic valuation -

-
As name suggest, it is derived

internally within the company.

-
i.e.
through the data internally
generated by company
the
eg
-

free cash flow, growth, Risk etc

-
Note -
No
Benchmarking (comparison)
with the peers is being done in
Intrinsic valuation.
2. Relative Pricing valuation ->

Benchmarking/comparison with
other companies is being done here.

-
How our
company is priced, based
on other companies traded in mit

- similar to Real estate, if you haveto


sell a plot, you will first
enquire about similar plot sold
in the
recently vicinity
3. Real option valuation -

Netflix and
- You are
valuing got
to know, they might get permission
to enter in china.

increase
-
This could substantially
the valuation. However,
it is still

uncertain.
-
In Real option valuation, we consider
"Entry to china"as call
a
option
and then perform valuation
through
Black scholes model.
-

3 pillars of DCF valuation

This is a
generic DCF model

ezt...... En
↳,
where value of firm today is
of future cash
its
Present value

flows.
-
3 pillars of DCF valuation

-
Whenever you
need to perform a

DCF valuation. Be mindful of

three
things.
Risk
Growth -

-
If you are able to control these

3 parameters; DCF is yours forever

Let's understand this ->


-
1. Cash

is of
-
what current
earnings
the
company?
needed
Is there
any adjustment
-

to
purify the earnings?
-
conversion of
earnings to

cash flows.
2. Growth

-
once the current cash
year's
flows

is established.

-
we need to consider future

in these cash flows.


growth
-
How long would be high
growth peaod?
&

-
what would be the terminal
year growth?
-

3. Risk
- In this pillar, we need to consider
the Risk in of these
growth
Cash flows

-
Risk in DCF valuation is factored
"Discount Rate".
through
-
Therefore discount Rate should
be consistent with the cash flow.

Don't worry; I will cover these in detail


I
what
you
need to do?

- Do a genic google search

-
Read aboutthese 3 methods in

detail.

Linkedin LIVE
-
we will be
having
Session on
wednesday 10pm to
all and doubts.
answer
your queries
Don't miss that.
to help others.
ST this
-

to
this
SAVE Revise later.
-
-

follow your man Parth for

content.
-

premium

See tomorrow with a detailed


you
Session on
reRate.

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