when you want to calculate the discount cash flow, just find the current year cash flow and estimate the discount rate; add both of them and find the
discount cash flow ;
1, find the cash flow.
2, estimate the discount factor.
3, divide together compound
1, find the cash flow
if you want to calculate any of the industry discount cash flow, then you must know; how to read the cash flow statements. otherwise, you find it hard to find the cash flow of the company.
if you go to your cash flow statement. then, you can see the operating cash flow activities, investing cash flow activities, and financial cash flow activities. now I give you; below the sample cash flow statement to calculate yourself here.
sample cash flow statement
take a look at the cash flow statement in operating cash flow. which is the operating cash of the current year in the particular industry.
and if you take a look at investing cash flow activities. you can able to see the options for property, plant, and equipment. some organization cash flow statements mention this as a capital expenditure, capex, etc…
however, to find the cash flow. you need to subtract the operating cash flow by property, plant, and equipment Then you will get the answer of the current year’s cash flow.
moreover, now let’s do the calculation on the sample cash flow statement; in which the operating cash flow is; 3,098 million dollars and plant, equipment, and property is 1,349 million dollars. if you subtract together. then you will find the cash flow is 1,749 million dollars.
which is simple, but let’s say; if you want to find the cash flow for the next 10 years then how did you find it?
find the average cash flow growth rate of beyond ten years.
add all of the past ten years’ cash flow growth together. if you don’t know where to find the growth rates. then, don’t worry. you may easily collect through financial sites like Yahoo Finance, MSN Money, etc… and you also buy your calculation.
let’s say every year the growth rate of the company is 6% and if you add the total: you will get 60% for ten years. then divide that by ten. you will get an average cash flow growth rate is 6%.
furthermore, add this 6% for the next ten years forward compound. then you will get the next ten-year cash flow.
we already calculate that; the current year cash flow is 1,749 million dollars.
so if you add it to the average growth rate of cash flow. what you will get for the next ten years. let’s take a look at the below table.
2, estimate the discount factor.
discount factor means you; at what discount you like to have when buying stock. let’s take as 10%. because nowadays federal bonds give 7%. then you want to find the discount factor for text ten years. I give below an example; of how a discount works. when you buy at a ten percent discount. then, on first year to ten years.
if you add all forward discount factors for next year; then, you will get the total discount amount of; 17.5311670611 dollars.
3, divide together compound
the DFCF formula is
DFCF= FCF/DF
DFCFn = Discounted free cash flow for year n
FCFn = Free cash flow for year n
DFn = Discount factor for year n
use this formula for every year and divide this by each per annum. let’s look here
DFCF= FCF/DF
first-year DFCF= 1,853.94 divided by / 1.10. then, you will get 1,685.412181.
continuously do this for ten each year and add all the divided answers together.
then finally you will find the discount cash flow. if you have any more doubts about discount cash flow, then don’t hesitate to feel free to contact us.