How to get stock price from DCF?

How to Calculate Stock Price Using the DCF Method

The Discounted Cash Flow (DCF) method is a valuation technique used to estimate the intrinsic value of a stock. It involves determining the present value of the company’s future cash flows and then dividing this value by the outstanding number of shares.

Steps to Calculate Stock Price Using DCF:

1. Determine Future Cash Flows:

Estimate the company’s future cash flows for a specific period, such as the next 5 or 10 years. These cash flows can include dividends, operating income, and other relevant sources.

2. Discount Future Cash Flows:

Discount each future cash flow back to its present value using an appropriate discount rate. The discount rate represents the cost of capital for the company and reflects the risk associated with its operations.

3. Sum Present Value of Cash Flows:

Add up the present values of all the future cash flows to obtain the company’s present value, also known as its enterprise value.

4. Divide by Outstanding Shares:

Divide the enterprise value by the number of outstanding shares to derive the stock’s intrinsic value.

Formula:

Stock Price = Enterprise Value / Outstanding Shares

Example:

Consider a company with the following assumptions:

• Future Cash Flows (5 years): $100, $120, $140, $160, $180
• Discount Rate: 10%
• Outstanding Shares: 1 million

Calculation:

• Present Value of Cash Flows:
  • PV(Year 1) = $100 / (1 + 10%)^1 = $90.91
  • PV(Year 2) = $120 / (1 + 10%)^2 = $108.11
  • PV(Year 3) = $140 / (1 + 10%)^3 = $122.45
  • PV(Year 4) = $160 / (1 + 10%)^4 = $133.13
  • PV(Year 5) = $180 / (1 + 10%)^5 = $141.04
• Enterprise Value = $90.91 + $108.11 + $122.45 + $133.13 + $141.04 = $595.64 million
• Stock Price = $595.64 million / 1 million = $595.64 per share

Therefore, the intrinsic value of the stock, using the DCF method with the given assumptions, is estimated to be $595.64 per share.