Intrinsic Valuation and Discounted Cash Flow Valuation
"Every Story has a Number and Every Number has a Story" - Aswath Damodaran

• Intrinsic valuation: A technique to value a business based on its specific characteristics like expected cash flows, growth, and risk.
• Discounted cash flow (DCF) valuation: A tool to estimate intrinsic value by calculating the present value of a business's expected cash flows.

Two methods of DCF valuation:

• Expected cash flow valuation: Estimates expected cash flows over time and discounts them back to the present using a risk-adjusted rate.
• Certainty equivalent cash flow valuation: Estimates certainty equivalent cash flows (equivalent to expected cash flows in terms of risk) and discounts them back to the present using a risk-free rate.

Choosing the right DCF method:

• Expected cash flow: Suitable for less risky businesses.
• Certainty equivalent: More appropriate for highly risky businesses.

Financial balance sheet sides:

• Investments in place: Existing investments made by the business.
• Growth assets: Future investments planned by the business.

Valuation options:

• Equity valuation: Considers cash flows received by equity investors only.
• Whole business valuation: Considers all cash flows generated by the business, including those for debt holders.

Discount rate:

• Equity valuation: Uses cost of equity as the discount rate.
• Whole business valuation: Uses cost of capital (weighted average of cost of equity and debt) as the discount rate.

Internal consistency in DCF valuation:

• Use the same discount rate for all cash flows being discounted.

​- I try to study Dr. Aswath Damodaran and all my Valuation articles are motivated from insights and teachings from Dr. Aswath Damodaran. So, all credits to Dr. Damodaran and his teaching style.