Inflation in a DCF Valuation: Use Nominal Cash Flows Only
Does inflation impact a DCF valuation? How? We need to go back to the basics of a DCF valuation to understand the answers to these questions. The bottom line is that you’ll want to use nominal cash flows instead of inflation-adjusted “real” cash flow estimates. It’s a minor detail, but could tip the scales on […]
Understanding AFFO for REITs: The REIT Equivalent of Free Cash Flow
Estimating a valuation for a REIT is vastly different than a valuation for any other company because of the unique business model for REITs. That’s why investors need to use REIT-specific metrics such as FFO (Funds from Operations) and AFFO (adjusted Funds from Operations) to estimate Free Cash Flow and valuations. Creating a rough estimate […]
Residual Income Valuation Method – CFA Level 2
Valuing a company using the residual income method is an interesting technique not many retail investors are aware of which is covered in CFA Level 2. Value investors will enjoy the residual income method because of its starting point at book value before going on to add the present value of expected residual income. This […]
How to Estimate Future Free Cash Flow Growth for a Mature Cash Cow
Post updated: 9/07/2023 When it comes to projecting or estimating future free cash flow growth, there isn’t a strict science behind it. Some common methods involve ROE and retention ratio, for example. While using traditional methods to estimate future free cash flow growth can help for a ballpark projection, this can be inaccurate for many […]
How to: Excess Return Model for Valuing Financial Stocks
Valuing banks, insurance companies, and investment banks are among the more difficult challenges in valuing any business. Most investors opt for relative valuations that use multiples to compare value from one to company to another in large part. There is nothing inherently wrong with this strategy, but sometimes comparing multiples leads to overvaluation; if the […]
MLP Valuation – Taxes and Metrics for this High Yielding Investment
Master Limited Partnerships, also known as MLPs, are a great vehicle for income investors, similar to REITs, in that they distribute the majority of their earnings in the form of dividends. However, not many investors are familiar with these types of investments, let alone how to conduct an MLP valuation. Dividends and the search for […]
Required Rate of Return: A Guide to Determine Discount Rate for a DCF
Great investors from Warren Buffett, Charlie Munger, Mohnish Pabrai, and Peter Lynch all have different required rates of return they demand before investing. Using these rates helps them generate the great returns they have made over their investing careers. The debate concernings the required rate of return is a subject discussed at all levels of […]
Average Discount Rate for the Top Companies in the S&P 500
Setting a reasonable discount rate is critical to getting a reasonable valuation. Like with history, I believe that getting context on averages, in this case the average discount rate, throughout a large portion of the stock market will help you figure out if your chosen discount rate is reasonable or not. A discount rate is […]
CAPM Assumptions, and its Practical Application to DCFs
The CAPM (Capital Asset Pricing Model) is commonly used to estimate a discount rate for cash flows in a DCF calculation (in particular, the cost of equity). This post will highlight a few of the CAPM assumptions that led to the creation of theory. What’s the CAPM trying to do? Basically, taking the conclusions from […]
Building a 3-Statement Financial Model to Estimate a DCF and Intrinsic Value
Building a 3-statement financial model is the most detailed way to create a discounted cash flow and estimate a company’s intrinsic value. By having all 3 financial statements, the balance sheet, income statement, and cash flow, investors can then seamlessly estimate a company’s value in any approach they desire. Also, with a 3-statement financial model, […]
