1. Guide To Excel For Finance: Introduction
  2. Guide To Excel For Finance: Goal Seek
  3. Guide To Excel For Finance: PV And FV Functions
  4. Guide To Excel For Finance: HLookup And VLookup
  5. Guide To Excel For Finance: Linking Yahoo! Finance and Other Outside Financial Data To Excel
  6. Guide To Excel For Finance: Ratios
  7. Guide To Excel For Finance: Technical Indicators
  8. Guide To Excel For Finance: Valuation Methods
  9. Guide To Excel For Finance: Advanced Calculations
  10. Guide To Excel For Finance: Conclusion

There is not a specific function to run a full discounted cash flow model in Excel, but there are a number of tools to make the exercise much more straightforward. As touched upon in the PV and FV functions on a previous page, it is first necessary to estimate either the present or future value of a security, then also estimate its future cash flows. Discounting these cash flows back by an estimated discount rate will provide a future value. Conversely, starting with a present value and cash flows can allow the user to back into the estimated future value.

In addition to the above two functions, Microsoft has an IRR function that lets you back into the discount rate, or specifically the internal rate of return, for a series of cash flows. Excel points out that this is very closely related to the PV function, meaning the same inputs are needed, such as an initial present value followed by a string of cash flows.

The below details a specific cash flow stream for an investment, starting with an initial investment of $70.

Dividend Discount Model DDM
The dividend discount model (DDM) represents another approach to estimate the value of a stock or company by discounting back its estimated future dividend rates. It is very similar to a DCF, but uses dividends instead of cash flows. A basic model can be built an only requires knowing the current dividend rate, estimated dividend growth rate, and discount rate, or required rate of return.

However, there are more complicated ways to look to estimate dividends, including at rates that change over time. Below is an example of just how complicated the exercise can become:

Residual Income Model (RIM)
Along with the DDM, the residual income model (RIM) is another specialized version of a DCF used to value a firm. In its most basic form, the RIM has an equity charge that is equal to equity capital multiplied by the cost of equity. This is subtracted from net income to get to a residual income figure, which is used in lieu of cash flow or dividends, as calculated in the DCF and DDM models. Residual income figures can easily be modeled and calculated in Excel, but there are a number of steps to get to these calculations.

Below is an example of a full RIM as created in Excel:

Name of Firm:
Date of Valuation:
($ and shares in millions)
Growth Rates:
First 5 years
Years 6 – 10
After 10 years
Capital Retention Rates:
First 5 years
Years 6 – 10
After 10 years
Past Year Normalized Earnings
$ 3,688
Beginning Book Value of Equity
$ 20,119
Expected Rate of Return on Equity
Discount Rate

And below are the outputs, as calculated by the above RIM:

Book Value
Present Value of
of Equity
Residual Earnings
Intrinsic Value
IV per Share
$ 20,119
$ 86,209
$ 37

Bond Valuation
There are a number of bond valuation functions in Excel. The "PRICE" function returns the estimated market value of a bond with a $100 face value. Below are the details of the metrics needed to value such a bond, which happens to be $90.20, based on the inputs provided.

Other bond functions include the ability to calculate a bond's duration, modified duration, yield to maturity, yield, and discount rate.Basically, there is the ability to solve for any variable when valuing a bond.

Guide To Excel For Finance: Advanced Calculations

Related Articles
  1. Personal Finance

    DCF Vs. Comparables: Which One To Use

    DCF and Comparables models are widely used in equity valuation. We explain the pros and cons of each method.
  2. Investing

    How To Choose The Best Stock Valuation Method

    Don't be overwhelmed by the many valuation techniques out there - knowing a few characteristics about a company will help you pick the best one.
  3. Investing

    Discounted Cash Flow Analysis

    Find out how analysts determine the fair value of a company with this step-by-step tutorial and learn how to evaluate an investment's attractiveness for yourself.
  4. Investing

    Taking Stock Of Discounted Cash Flow

    Learn how and why investors are using cash flow-based analysis to make judgments about company performance.
  5. Investing

    Should You Use DCF for Valuation?

    We explain the two primary valuation techniques—DCF and Comparables—used to predict future stock prices.
  6. Small Business

    Calculating Net Present Value at Different Points Using Excel

    Calculating the net present value (NPV) of your investment projects using Excel.
  7. Investing

    Digging Into The Dividend Discount Model

    The DDM is one of the most foundational of financial theories, but it's only as good as its assumptions.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center