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By Ben McClure
As you have seen, DCF analysis tries to work out the value of a company today, based on projections of how much money it will generate in the future. The basic idea is that the value of any company is the sum of the cash flows that it produces in the future, discounted to the present at an appropriate rate.
In this tutorial, we have shown you the basic technique used to generate fair values for the stocks that you follow. But keep in mind that this is just one approach to doing DCF analysis; every analyst has his or her own theories on how it should be done.
Although manually working your way through all the numbers in DCF analysis can be a time-consuming and tricky process at times, it's not impossible. Yes, using a DCF model probably entails a lot more work than relying on traditional valuation measures such as the P/E ratio, but we hope this step-by-step guide has shown you that it is worth the effort.
DCF analysis treats a company as a business rather than just a ticker symbol and a stock price, and it requires you to think through all the factors that will affect the company's performance. What DCF analysis really gives you is an appreciation for what drives stock values.
Here are some external resources that you may want to check out:
Damodaran Online - Aswarth Damodaran, professor of finance at
Valuing Intel: A Strange Tale Of Analysts And Announcements - Bradford Cornell, professor at UCLA's Anderson Graduate School of Management, has produced an excellent DCF analysis that assesses market and stock analysts' reactions to an Intel Corp. earnings announcement.
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