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A Tutorial on the Discounted Cash Flow Model for Valuation of Companies

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  • Jennergren, L. Peter

    (Dept. of Business Administration, Stockholm School of Economics)

Abstract

All steps of the discounted cash flow model are outlined. Essential steps are: calculation of free cash flow, forecasting of future accounting data (income statements and balance sheets), and discounting of free cash flow. There is particular emphasis on forecasting those balance sheet items which relate to Property, Plant, and Equipment. There is an exemplifying valuation included (of a company called McKay), as an illustration. A number of other valuation models (abnormal earnings, adjusted present value, economic value added, and discounted dividends) are also discussed. Earlier versions of this working paper were entitled "A Tutorial on the McKinsey Model for Valuation of Companies".

Suggested Citation

  • Jennergren, L. Peter, 1998. "A Tutorial on the Discounted Cash Flow Model for Valuation of Companies," SSE/EFI Working Paper Series in Business Administration 1, Stockholm School of Economics, revised 13 Dec 2011.
    • Handle: RePEc:hhb:hastba:0001
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    References listed on IDEAS

    as
    1. Richard S Ruback, 2002. "Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows," Financial Management, Financial Management Association, vol. 31(2), Summer.
    2. Jennergren L. Peter, 2011. "Approximate Firm Valuation with Operating Leases," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 6(1), pages 1-22, September.
    3. Jennergren, L. Peter, 2011. "Firm Valuation with Operating Leases," SSE/EFI Working Paper Series in Business Administration 2011:3, Stockholm School of Economics, revised 30 May 2011.
    4. Skogsvik, Kenth, 1999. "A Tutorial on Residual Income Valuation and Value Added Valuation," SSE/EFI Working Paper Series in Business Administration 1999:10, Stockholm School of Economics, revised 03 Sep 2002.
    5. Jennergren L. Peter, 2010. "On the Forecasting of Net Property, Plant and Equipment and Depreciation in Firm Valuation by the Discounted Cash Flow Model," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 5(1), pages 1-28, November.
    6. Jennergren, L. Peter, 2004. "Continuing Value in Firm Valuation by the Discounted Cash Flow Model," SSE/EFI Working Paper Series in Business Administration 2004:15, Stockholm School of Economics.
    7. Robert A. Taggart & Jr., 1991. "Consistent valuation and Cost of Capital Expressions With Corporate and Personal Taxes," Financial Management, Financial Management Association, vol. 20(3), Fall.
    8. Jennergren L. Peter, 2013. "Firm Valuation with Bankruptcy Risk," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 8(1), pages 91-131, October.
    9. Russell Lundholm & Terry O'Keefe, 2001. "Reconciling Value Estimates from the Discounted Cash Flow Model and the Residual Income Model," Contemporary Accounting Research, John Wiley & Sons, vol. 18(2), pages 311-335, June.
    10. Jennergren, L. Peter, 2008. "Continuing value in firm valuation by the discounted cash flow model," European Journal of Operational Research, Elsevier, vol. 185(3), pages 1548-1563, March.
    11. Jennergren, L. Peter, 2004. "Loan Subsidy Valuation," SSE/EFI Working Paper Series in Business Administration 2004:8, Stockholm School of Economics.
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    Cited by:

    1. Jennergren L. Peter, 2013. "Firm Valuation with Bankruptcy Risk," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 8(1), pages 91-131, October.
    2. Jennergren L. Peter, 2010. "On the Forecasting of Net Property, Plant and Equipment and Depreciation in Firm Valuation by the Discounted Cash Flow Model," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 5(1), pages 1-28, November.
    3. Jennergren, L. Peter, 2009. "On the forecasting of lease expense in firm valuation," SSE/EFI Working Paper Series in Business Administration 2009:12, Stockholm School of Economics, revised 22 Feb 2010.

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    Keywords

    Valuation; free cash flow; discounting; accounting data;
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