Discounted Cash Flow

What this video covers

• Why DCF values any investment as the present value of all expected future cash flows, and how free cash flow projections depend on revenue growth, profit margins, and capital expenditures
• What terminal value represents: the present value of all cash flows beyond the explicit forecast period, typically 60 to 80 percent of total DCF valuation
• How the Gordon Growth Model calculates terminal value as a growing perpetuity, and why small changes in the long-term growth rate (g) or discount rate (r) create outsized swings in terminal value
• The exact DCF-vs-DDM distinction: DDM is a narrow type of DCF that uses only dividends, while DCF uses free cash flow and applies to any company including non-dividend payers
• Why a higher discount rate (required rate of return) always lowers intrinsic value, and the inverse relationship the exam tests repeatedly
• How to interpret intrinsic value versus market price: undervalued (buy) when intrinsic value exceeds price, overvalued (sell or avoid) when it is below
• The enterprise value to equity value bridge: subtract net debt, then divide by shares outstanding to reach intrinsic value per share