Discounted Cash Flow (“DCF”)

A discounted cash flow  is a fundamental technique to value an investment. The value of an asset is the value of the future benefits it brings. The value of an investment is the cash flows that it will generate for the investor: interest payments, dividends, repayments, returns of capital, etc. The DCF approach is based on calculating the present value of the generated stream of cash flows by the company. In a DCF valuation, a discount rate is chosen, which reflects the risk; higher the risk, higher the discount rate, and this is used to discount all forecast future cash flows to calculate a present value.

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