1. Two Parts to a DCF Forecast
As we've discussed, predicting the future is impossible,
and the further we predict into the future, the more prone to error
our estimates become, so we typically limit our DCF models to two stages.
The first stage covers an explicit forecast period,
typically five to 10 years, and this is where we will calculate free
cash flows each year based on our projections and assumptions.
The second stage is the terminal stage. At this point, we make an
assumption that cash flows will grow at some constant rate forever,
or we assume the company will be acquired at some multiple.
Regardless of the stage, we will discount all cash flows and the terminal
value back to the present at the appropriate discount rate.
Now let's talk about key assumptions that drive a DCF model,
as well as the different ways to calculate unlevered free cash flows.
2. Let's practice!