DISCOUNTED

CASH FLOWS
METHODS
Chapter 5

REPORTED BY: CALUMBA, CLAVERIA,

JUMAWAN, RAMOS, & TORRES
DISCOUNTED CASH FLOW METHOD
A valuation method that estimates the value of an investment using
its expected future cash flow.

It attempts to determine the value of an investment today based on

projections of how much money that investment will generate in
the future.

“WHAT ARE THE COMPANY’S FUTURE CASH FLOWS WORTH

IN TERMS OF TODAY’S VALUE?”

VALUATION CHAPTER 5
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The amount of cash available for distribution

NET CASH to both debt and equity claims of the business
or asset.
FLOWS
 NET CASH FLOWS IS PREFERRED AS BASIS OF
VALUATION IF ANY OF THE FOLLOWING CONDITIONS
ARE PRESENT:
• The company does not pay dividends

• The company pays dividends but the amount paid out significantly differs from its capacity to
pay dividends

• Net Cash Flows and profits are aligned within a reasonable forecast period

• Investor has a control perspective. If an investor can exert control over a company, dividends
can be adjusted based on the decision of the controlling investor.
 VALUATION CHAPTER 5

METRICS EBITDA EBIT

THAT ARE Earnings before interest, taxes,
BEFORE depreciation, and amortization, is
TAXES an alternate measure of
profitability to net income.
Earnings before interest and taxes.
Subtotals used to indicate a company's
profitability. It can be calculated as the
company's revenue minus its expenses,
excluding tax and interest.
IN VALUATION, ANALYSTS FIND ANALYZING CASH FLOWS
AND ITS SOURCES HELPFUL IN UNDERSTANDING THE
FOLLOWING:

SOURCE OF FINANCING FOR NEEDED INVESTMENTS

Are investments internally funded by cash generated from operations or debt/equity financing is
necessary? The best case for firms is to fund its investments wholly or partly through cash from
operations.

RELIANCE ON DEBT FINANCING

Debt financing is an excellent financing strategy especially for expanding companies.

QUALITYOF EARNINGS
Significant disparities between cash flows and income may indicate earnings does not get
converted to cash easily. suggesting low quality.
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01. 02.

NET CASH FLOWTO NET CASH FLOWTO

TWO THE FIRM EQUITY
LEVELS OF the amount made
the amount of cash flows made available to

NET CASH available to both debt

and equity claims
the equity stockholders after deducting the
net debt or the outstanding liabilities to the
FLOW against the company
creditors less available cash balance of the
company
NET CASH FLOW TO
THE FIRM
Refers to the cash flow available to the parties who supplied capital (i.e.
lenders, shareholders), after paying all operating expenses, including
taxes, and investing in capital expenditures and working capital as
required by business needs.

Cash flow generated from operating activities of the business which is

intended to pay required return of fund providers.

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• Valuation models based on enterprise value encompass cash flows available to all
investors- whether debt or equity.

ENTERPRISE VALUE
Refers to the theoretical value of its core business activities as reflected by
its net cash flow.

Enterprise value (EV) measures a company’s total value, often used as a more
comprehensive alternative to equity market capitalization

• Net Cash flow only contributes items are directly related to the OPERATING and
INVESTING ACTIVITIES of the business, and exclude Financing Activities

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