10-03-2005, 11:36 PM
So you find a company that you're interested in, and you decide to value it using a discounted cash flow analysis. You do it right, creating an income statement, balance sheet and statement of cash flows, and use them to discover the free cash flow thrown off by the company, as well as the key value drivers that will allow you to make educated forcasts for the next 10 years or so of FCF. After that, you use a growing perpetuity to represent continuing value of the company.
You discount your forcasted cash flows using an appropriate discount rate found by calculating the weighted average cost of capital for your company, to get a company value from which you subtract debt to finish with an equity value.
the value per share you discover is $15.
Feeling proud, you bring up yahoo to look at the current price of the company's equity per share.
15.40
Huh, so the market has already done this type of analysis, and come to similar conclusions. Not surprising, because all the information you used was publicly available.
However, the other benefit of your analysis was that you recognized the company's value drivers relative to its peers, and know the company could be worth more if they focused working capital where it was needed and not where it just looks nice from an EPS standpoint.
You decide to become a consultant. No?
You discount your forcasted cash flows using an appropriate discount rate found by calculating the weighted average cost of capital for your company, to get a company value from which you subtract debt to finish with an equity value.
the value per share you discover is $15.
Feeling proud, you bring up yahoo to look at the current price of the company's equity per share.
15.40
Huh, so the market has already done this type of analysis, and come to similar conclusions. Not surprising, because all the information you used was publicly available.
However, the other benefit of your analysis was that you recognized the company's value drivers relative to its peers, and know the company could be worth more if they focused working capital where it was needed and not where it just looks nice from an EPS standpoint.
You decide to become a consultant. No?