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2022•Unpublished venueRequires access

Discounted Cash Flow Analysis

Paul Pignataro

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Abstract

In order to properly value a business based on cash flows, one need to first establish the appropriate cash flows to value – the unlevered free cash flow (UFCF). Discounting the UFCFs gives us the implied value of the company for just the first five years. The terminal value of a company estimates the value of the business after the last estimated year. There are two major methods for calculating the terminal value of a company: multiple method and perpetuity method. Some investors prefer to calculate shorter-term betas based on 10-year metrics; we prefer longer-term betas, as a discounted cash flow (DCF) analysis is a representation of a business far into maturity and perpetuity. DCF tab is utilized in the spreadsheet for Amazon DCF analysis. As per the UFCF formula, one need to first locate Amazon's projected 2021 EBIT.

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What this paper is about

In order to properly value a business based on cash flows, one need to first establish the appropriate cash flows to value – the unlevered free cash flow (UFCF). Discounting the UFCFs gives us the implied value of the company for just the first five years. The terminal value of a company estimates the value of the business after the last estimated year. There are two major methods for calculating the terminal value of a company: multiple method and perpetuity method. Some investors prefer to calculate shorter-term betas based on 10-year metrics; we prefer longer-term betas, as a discounted cash flow (DCF) analysis is a representation of a business far into maturity and perpetuity. DCF tab is utilized in the spreadsheet for Amazon DCF analysis. As per the UFCF formula, one need to first locate Amazon's projected 2021 EBIT.

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Available abstract

In order to properly value a business based on cash flows, one need to first establish the appropriate cash flows to value – the unlevered free cash flow (UFCF). Discounting the UFCFs gives us the implied value of the company for just the first five years. The terminal value of a company estimates the value of the business after the last estimated year. There are two major methods for calculating the terminal value of a company: multiple method and perpetuity method. Some investors prefer to calculate shorter-term betas based on 10-year metrics; we prefer longer-term betas, as a discounted cash flow (DCF) analysis is a representation of a business far into maturity and perpetuity. DCF tab is utilized in the spreadsheet for Amazon DCF analysis. As per the UFCF formula, one need to first locate Amazon's projected 2021 EBIT.

Key concepts: Perpetuity, Terminal value, Discounted cash flow, Cash flow, Free cash flow, Discounting, Cash on cash return, Net present value

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