Series XVMediumFundamental Analysis

The Discounted Cash Flow (DCF) method values a company by:

AEstimating future free cash flows and discounting them to present value at an appropriate ratecheck_circle
BTaking the book value of its net assets
CMultiplying current earnings by an industry P/E ratio
DAveraging the last five years' share prices

Correct answer

A. Estimating future free cash flows and discounting them to present value at an appropriate rate

lightbulbDetailed Solution

DCF is an intrinsic-value method: it forecasts the firm's future free cash flows and discounts them back to today using a discount rate (typically the WACC) that reflects their risk and the time value of money. The sum of the discounted cash flows (plus terminal value) is the estimated enterprise value.

Reference: NISM Series XV Research Analyst, Chapter 3.

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