Which valuation method relies on projecting free cash flows and discounting them to present value?

Which valuation method relies on projecting free cash flows and discounting them to present value?

• A. Asset-based valuation.
• B. Comparable Companies.
• C. Discounted Cash Flow Analysis.
• D. Precedent Transactions.

Answer: (C)

Discounting projected free cash flows to present value is discounted cash flow analysis. This method estimates a company’s intrinsic value based on its ability to generate cash over time, rather than on current assets or market prices of peers. You forecast annual free cash flows, pick a discount rate that reflects risk and the cost of capital (typically the weighted average cost of capital), and estimate a terminal value to represent all cash flows beyond the forecast window. Discount those amounts back to today and sum them to get the enterprise value, then adjust for debt and cash to derive equity value if needed. Free cash flow represents the cash a business can generate after essential expenditures, available to all providers of capital. Other approaches—asset-based valuations or relative valuations using peers or past deals—rely on asset values or market multiples rather than explicit long-term cash-flow projections.

Discounting projected free cash flows to present value is discounted cash flow analysis. This method estimates a company’s intrinsic value based on its ability to generate cash over time, rather than on current assets or market prices of peers. You forecast annual free cash flows, pick a discount rate that reflects risk and the cost of capital (typically the weighted average cost of capital), and estimate a terminal value to represent all cash flows beyond the forecast window. Discount those amounts back to today and sum them to get the enterprise value, then adjust for debt and cash to derive equity value if needed. Free cash flow represents the cash a business can generate after essential expenditures, available to all providers of capital. Other approaches—asset-based valuations or relative valuations using peers or past deals—rely on asset values or market multiples rather than explicit long-term cash-flow projections.