Putting DCF into Action

Course 404:



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	Morningstar's Fair Value Estimates
8	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 >>




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