1. DCF Advantages and Disadvantages
Now, let's take a look at some of the advantages and disadvantages of
a DCF. Some advantages, theoretically, the DCF is the most correct way to
value companies or investments. Correct, meaning that investments are only
worth making, if they eventually generate free cash flow,
and DCF provides an opportunity to learn about the company and industry.
Before we actually begin creating our DCF, we must have a thorough understanding
of the target's business. In order to learn about the target company,
we should review its financials and read any published research on the company
and industry. A DCF is also less prone to market conditions,
since it's an intrinsic valuation not a relative valuation.
But some of the disadvantages, well, it requires a lot of inputs,
and the model is only as good as those inputs.
Given all of the inputs, it's easier to manipulate a DCF to a
desired outcome and the greater complexity of the DCF model
may give an analyst a false sense of precision.
2. Let's practice!