Dcf - a Valuation Methodologywhich

Quick background:

One could find it really hard to understand as to how a stock analyst put or estimate "fair value" for companies in any merger or acquisition or buy-out scenarios, or why their target price estimates varyriotously.

The response to estimating fair value often lies in how the valuation method which is popularly known as discounted cash flow ("DCF") is applied.

The DCF is a valuation methodologywhich is generally put to use in order to guess the attractiveness of any investment opportunity being eyed by an investor or buyer. The DCF methodology analysis the future free cash flow ("FCF") projections and apply discountingfactor to arrive at a present value approximation, which is used to evaluate whether there is any potential for investment. Generally, in case the value arrived at by applying the DCF analysis is found higher than the current cost of the investment, the investment opportunity may be considered a profitable one.

In a nutshell, the discounted cash flow attempts to work out the value of a fictional company today basisthe projections given by the management of the company of as to in what waymoney is going to be made in the future. The DCF analysis states that a company is worth all of the money that it could be made available to the investors or buyers in the future.

To put the number perspective, in case one is asked to choose between receiving USD10 today and receiving USD10 in a year. The likelihoods are that one would take the money todayin view of knowing that one could invest that USD10 now and have more than USD10 in a year's time from now. In view of the above, one would say that the amount that you'd have in one year is worth USD10 dollars today - or the discounted value is USD10. One need to undertake the same calculation for the moneyone would expect a company to produce in the future and one would have a good measure of the company's value.

The investment bankers put to test several tried and tested approaches to DCF analysis, including the dividend discount model (DDM) approach and the cash flow to firm approach.

As an investor, one would have a lot to gain from mastering DCF analysis. For