Course 404:
Putting DCF into Action
In this course
1 Introduction
2 Step 1--Project Free Cash Flow
3 Step 2--Determine a Discount Rate
4 Step 3--Discount Projected Free Cash Flows to Present
5 Step 4--Calculate Discounted Perpetuity Value
6 Step 5--Add It All Up
7 The Bottom Line

Now that we have covered the workings of discounted cash-flow (DCF) models in general and a bit about how we treat them at Morningstar, we'll dig a little deeper into how to determine fair values for stocks. In this lesson, we'll walk you through a step-by-step sample DCF model that uses the "free cash flow to equity" method. Here are the main steps to generating a per share fair value estimate with this method:

  • Step 1. Project free cash flow for the forecast period.
  • Step 2. Determine a discount rate.
  • Step 3. Discount the projected free cash flows to the present, and sum.
  • Step 4. Calculate the perpetuity value and discount it to the present.
  • Step 5. Add the values from Steps 3 and 4, and divide the sum by shares outstanding.

Next: Step 1--Project Free Cash Flow >>

Print Lesson |Feedback | Digg! digg it
Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.
Copyright 2010 Morningstar, Inc. All rights reserved. Please read our Privacy Policy.
If you have questions or comments please contact Morningstar.