Module II· DCF — Mechanics & FCFBasic
Question
What is the DCF method and why is it considered an 'intrinsic' valuation?
Answer
Definition
A DCF values a company as the present value of its future free cash flows.
Example
You take the cash flows of a company like SAP over 5–10 years and discount them at the WACC (around 8%). The sum gives the Enterprise Value.
Why 'intrinsic'
The valuation comes from fundamentals (growth, margins, capex, taxes) — not from the market prices of comps.
Strength vs. weakness
Independent of market sentiment (good), but dependent on many assumptions (risky).