Valuation of business using DCF

Two most popular valuation methods:

1. Discounted cash flow (DCF) approach;

2. Comparables approach

We are talking about DCF in this topic.

DCF approach can be used to estimate the value of an equity stake either directly or indirectly.

1. Direct approach: Dividend discount model (DDM);

2. Indirect approach: Free cash flow to the firm (FCFF) model;

This topic focuses on the indirect approach.

Constant Growth Model: A variant of the discount cash flow model. An assumption that cash flows grow at a constant rate (g) forever yields the constant growth model. Note that the shareholders' reuquired return re must exceed g for this model to give a positive value for the share price.

It's employed to calculate the terminal value (next firm's value) in the calculation of firm's value using FCFF method;