![]() ![]() The last step is to then divide the equity value by the number of shares outstanding. The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$5.6b. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.0%. In this case we have used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. Present Value of 10-year Cash Flow (PVCF) = US$1.1b ("Est" = FCF growth rate estimated by Simply Wall St) ![]() Present Value ($, Millions) Discounted 6.0% We do this to reflect that growth tends to slow more in the early years than it does in later years.Ī DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars: 10-year free cash flow (FCF) forecast We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. In the first stage we need to estimate the cash flows to the business over the next ten years. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth.
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