⚠️ Disclaimer: This is an experimental project and may contain errors. Do not make any investment decisions based on this tool.

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Discounted Cash Flow (DCF) Model Overview

The Discounted Cash Flow (DCF) model in investing works as follows:

1. Estimate Future Cash Flows: Analysts forecast the company’s future cash flows.
2. Discounting: These future cash flows are discounted to their present value using a discount rate.
3. Summing: All discounted cash flows are summed up.
4. Comparison: The resulting value is compared to the current market price of the stock.
5. Decision: If the calculated value is higher than the market price, the stock is considered undervalued and potentially attractive for purchase.

DCF Formula

The formula for DCF is:

[ \text{DCF} = \sum \left( \frac{CF_t}{(1 + r)^t} \right) + \frac{TV}{(1 + r)^n} ]

Where:

• (\sum) denotes the sum
• (CF_t) is the expected cash flow in year (t)
• (r) is the discount rate
• (t) is the time period (typically in years)
• (TV) is the terminal value (value of the company at the end of the forecast period)
• (n) is the number of years in the forecast period

Expanded Formula

[ \text{DCF} = \frac{CF_1}{(1 + r)^1} + \frac{CF_2}{(1 + r)^2} + \dots + \frac{CF_n}{(1 + r)^n} + \frac{TV}{(1 + r)^n} ]

This formula sums the discounted cash flows for each year of the forecast period and adds the discounted terminal value. The result is the estimated present value of the company’s future cash flows.

Results from the DCF Model

1. Company’s Intrinsic Value: This is the total estimated value of the company based on discounted future cash flows.
2. Intrinsic Value per Share: This value is calculated by dividing the total intrinsic value of the company by the number of shares outstanding.
3. Market Comparison:
   • Intrinsic Value to Market Price Ratio: Indicates if the stock is undervalued (ratio > 1) or overvalued (ratio < 1).
   • Potential Gain/Loss: The difference between the calculated intrinsic value and the current market price, often expressed as a percentage.

These results help investors assess whether a stock is attractive for buying, selling, or holding based on a comparison of the calculated intrinsic value with the current market price.