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Followed by EP15 that covered three main valuation approaches (ratio-based, asset-based, and acquisition-based), this episode covers a Discount Cash Flow (DCF) approach to derive an intrinsic value of a company. In this episode, I discuss three important questions for the DCF approach and show you how you can estimate the intrinsic value by using a 2-stage DCF analysis.
- Estimate the first year normalized future cash flow after excluding unexpected items
- Determine the first stage growth rate depending on the characteristics of the business
- Calculate a terminal value by assuming that the company is mature
- Use an appropriate discount rate (either 30 yr Treasury bond rate or other approaches such as WACC)
Additionally, I cover how you can include conservatism as a value investor in three different places (cash flow projection, discount rate, and margin of safety).
DCF tool available on: https://www.gurufocus.com/