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The discounted cash flow calculator is a fantastic tool that investment analysts use to determine the fair value of an investment. By adding the company's free cash flow to firm or the earnings per share to the discount rate (WACC), we can find out if the current price of a security or business is cheap or expensive.
The discounted cash flow model is an income valuation method that determines the fair value of a company or stock by analyzing the future expected cash flows and defining how much they value in the present.
Let's think about it for a second: what is the value of a company to its owners? As mentioned in the free cash flow calculator, owners expect to receive cash flows from the company. Such cash flows can be in the form of dividends, for example.
So, cash flows are valuable and represent the return on the investment shareholders/owners made when they started the company. The same approach can be used when new investors want to buy shares of the business or, on a bigger scale, when a company wants to acquire another one:
We have to value the business's future cash flows, which represent the return, and see if what we are going to pay for the company in the present makes it a sound investment.
And that's the strategy of the discounted cash flow approach. The expected future cash flows are projected up to the company's life. Then these future cash flows have to be valued in the present. To facilitate that, we use the concept of the net present value, which considers a discount rate.
Some analysts prefer to use earnings per share to project future cash flows because they are the net earnings to the shareholders. In this DCF calculator, we will show you both methods.
