Discounted Cash Flow Valuation Research Articles

Netflix Stock Valuation

The COVID-19 pandemic wrought significant changes in people’s lifestyles, leading them to turn to entertainment options, with online streaming emerging as a popular choice during quarantine periods. In the initial half of 2020, Netflix experienced a surge, gaining over 26 million global subscribers (ACCA, 2020). This surge was mirrored in its stock price, skyrocketing from $287 per share in September 2019 to $690 in October 2021. Despite a subsequent decline to $482 as of January 2024, the stock still maintains nearly double its value from five years ago. As the pandemic’s influence wanes and more leisure options become available, questions arise about the justifiability of Netflix’s current stock valuation. This report employs two approaches to assess the fairness of Netflix’s stock: discounted cash flow valuation (DCF) and comparable companies analysis (CCA). The DCF method indicates a slightly lower intrinsic value than Netflix’s current stock price by half a dollar. The CCA model, utilizing data from Netflix and its six major competitors’ annual reports spanning 2017 to 2023, including the pre and post-pandemic periods, suggests that Netflix is significantly overvalued. Considering Netflix’s overall trend and underlying assumptions, the conclusion is drawn that Netflix’s stock price is overvalued.

Valuation of Stocks by Integrating Discounted Cash Flow With Imitation Learning and Guided Policy

The valuation of discounted cash flow (DCF) is one of the most appropriate methods to measure a company’s value, and it is also a fundamental method according to Warren Buffett to value a stock for investment. DCF analysis requires the estimations of the future free cash flow (FCF) and the weighted average cost of capital. However, these factors are often subject to an appraiser’s bias. To obtain a more objective DCF analysis, in this study, we develop a machine learning mechanism: imitation learning, which encompasses a teacher to demonstrate state-action pairs. To facilitate imitation learning, we adopt a guided policy search with the chronological order of a Levy distribution. This distribution can cover the stages of growth, decay, and long fat tail that correspond to a business life cycle. In this way, learning the trajectory of FCF can optimize the fitness between the FCF and the chronological order of a Levy distribution. The fitness achieved allows us to monitor the data by fitting the chronological order for the correct stage. The results show that regarding the Sharpe ratio and precision of DCF valuation, our approach outperforms the popular classification models -random forest and long short-term memory network. Code is available at https://github.com/YuanLongPeng/DCFValuation. <italic xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">Note to Practitioners</i> —Appraisers own knowledge for valuation of stocks to project FCFs and WACC. The knowledge has a broad spectrum, such as prospect of economic growth and competition in the industry. Threat of substitute products. This study proposed a method to automate the process of valuation by learning FCFs and WACC from data. The result of valuation is reproducible and free of the bias of appraisers.

‘Lying with numbers’ in international arbitration against states

Abstract Recent international arbitration cases, especially P&amp;ID v Nigeria, have highlighted how easy it is for claimants—whether in treaty-based Investor–State Dispute Settlement or commercial arbitration—to advance immense claims grounded on essentially no evidence against state respondents. This largely reflects the readiness of many quantum experts to engage in the practice which Martin Wachs called ‘lying with numbers’ in order to misrepresent the execution risks of speculative unbuilt projects in a manner that is radically at odds with empirical data regarding such execution risks, which is exacerbated by the ignorance of many arbitrators about business economics and discounted cash flow valuation. This situation is unlikely to improve, and overall standards of candour in valuation in international arbitration will keep going down as the system will keep rewarding the act of cloaking advocacy in the guise of scientific or technical rationality in order to ‘lie with numbers’.

Research on the Impact of Logistics and E-commerce on JD.com

ESG (Environment, Social, and Governance) considerations take significant weight in valuing a company for investors. They are essential to show each company’s growth and sustainability. As the generations change, more and more companies take ESG seriously and start advancing their products to gain more customers and build a sustainable brand image. In this report, ESG is primary factor in evaluating of JD.Com Inc. In the annual report of JD.Com Inc., it can be seen that there are three main segments of the operating income period, and two business segments account for the main part. Therefore, in this report, people will analyze the basic competitive situation of the two business sectors of the company and the judgment of competitive strategy respectively through Porter's Five Forces model. Analyze whether JD.Com Inc. is a company on the rise, the industry, and future prospects. This company belongs to an industry with highly predictable cash flow, so in this report, discounted cash flow valuation model (DCF model) will be used to analyze JD.Com Inc. Whether is at a reasonable valuation price.

Valuation of the IoT Industry Based on Relative and Absolute Valuation Method

In recent years, the IoT industry has experienced an extremely rapid development which attracts large amounts of investors. In this case, a suitable valuation for such industry is necessary to offer some suggestions for investments. Applying the relative valuation method and the absolute valuation method to analyze the valuation of the Internet of Things industry, this article studies the data development of five leading companies in the industry and performs the discounted cash flow valuation method on Hikvision, with the aim of providing regulatory advice to listed companies and providing investors with a basis for decision making. The results show that the overall development trend of the industry is found to be good at present, and the cash flow is in the state of increasing year by year but diminishing margin, but there may be a downward trend and the industry still has some room for growth in the future. These results shed light on guiding further exploration of IoT industry evaluation.

Bankruptcy Risk in Discounted Cash Flow Equity Valuation

We investigate the importance of bankruptcy risk in discounted cash flow (DCF) equity valuation. Our analyses first show how bankruptcy risk is incorporated in DCF valuation, where investment risk is captured by cash flow certainty equivalents. Within this general setting, we find that bankruptcy risk can be captured by discounting factors incorporating period-specific bankruptcy probabilities, allowing the numerators in a DCF valuation model to follow a binary random walk. Elaborating a model of this kind, we assess the value of the equity holders’ limited liability right (the equity holders’ right to hand over the firm to its creditors if bankruptcy occurs). Two valuation models commonly used in academic research and professional practice—the Dividend Discount Model (DDM) and the Residual Income Valuation (RIV) model—are addressed specifically. Our analyses show that bankruptcy probabilities are important for the estimation of the value drivers in both models. Even if bankruptcy probabilities are as low as 0.02, equity values might be severely exaggerated if bankruptcy risk is ignored in DDM or RIV. In particular, this holds for firms expected to have high future growth (conditioned on firm survival). For the RIV model to properly capture bankruptcy risk, we identify “bankruptcy event accounting principles” and an additional term that must be included in the model. We also show that bankruptcy risk under certain conditions can be handled through a specific calibration of the discounting rate/-s in all DCF models, allowing the value drivers—i.e., future dividends or residual income—to be forecasted conditioned on firm survival.

Asian Paints: a valuation dilemma

Learning outcomes This case study will allow students to understand and analyse the process for conducting equity valuation by building a three-statement financial model, to understand and apply the workings of discounted cash flow (DCF) valuation methodology and its components, to apply the concepts related to the calculation of the weighted average cost of capital in the determination of discounting rate, to understand the terminal value calculation and assumptions thereof and to analyse the intrinsic valuation for the target company using the traditional multi-stage DCF model for investment decision-making. Case overview/synopsis In July 2019, Kapil Agarwal, an equity analyst operating out of Mumbai, India, was carefully looking over the financials of Asian Paints, a leading paints company in India. As an equity analyst, Kapil was constantly on the lookout for fundamentally strong but undervalued companies that could create long-term wealth for his equity fund. To decide upon the right valuation of Asian Paints, Kapil conducted fundamental analysis using the DCF method on the basis of available financial information. This case study puts students in an investment analyst role wherein they forecast financial statements and conduct DCF valuation for Asian Paints to discover potentially undervalued stocks for investment decision-making. Complexity academic level This case study is designed for use in an undergraduate or postgraduate programme in business management, particularly in a course on business valuation or investment management or security analysis. Supplementary materials Teaching notes are available for educators only. Subject code CSS 1: Accounting and Finance.

Estimating the Growth Rate from Historical Data for Firms that Repurchase Stock

One of the most important steps in a discounted cash flow valuation of a firm is the estimation of g, the long-term growth rate. This is commonly estimated by calculating g as the addition to retained earnings divided by beginning common equity. A serious problem can occur if the firm has participated in a stock buyback because buying back stock deflates the denominator. The financial statements record the historical value of the firm’s stock. Our purpose here is to present to students the distortion that can occur when firms repurchase their stock and a simple adjustment process to illustrate the reasonableness of a growth estimate.

Stock Valuation and Business Performance of Property Industry Post COVID-19 Era (Case Study of PT B)

In 2019 the pandemic Covid-19 caused sharp decline on Indonesian economy, yet in 2021 the economic condition started to recover, indicated by 7% increase in Gross Domestic Product and Consumer Confidence Index. One sector influenced by strong economic recovery is property industry, furthermore government gave stimulus to boost property industry growth. PT B is a leading property developer having various projects and land bank across Indonesia. Post Covid-19 era, the financial performance of PT B showed a good condition, the evidence is the increase in company profitability and decline in the debt. The fundamentals contrast with the stock price as the price declined even in the recovery phase. This condition encourages the writer to do the research on PT B stock valuation and whether the share is classified as overvalued or undervalued. The research will utilize secondary such as financial reports, annual reports, public expose from idx.co.id, and other literature sources. The methodology to process the data is Discounted Cash Flow valuation method to find the actual intrinsic value and value-added intrinsic value, to find the fair value using Net Asset Value valuation method. The added value is a proposal to developing housing projects for Generation Z with goal to increase the company share price. The result is the stock fair value to be IDR 1,312 – 2,554. Finally, the author will determine if the stock of PT B is undervalued or overvalued based on the research results.

Analysis of Stock Valuation and Business Performance of a Digital Media Company in Indonesia Before and After the Covid-19 Pandemic (Case Study: Global Mediacom)

The rise of digital streaming and investing in Indonesia has been exacerbated by the COVID-19 pandemic. One company involved in this unprecedented scenario is PT Global Mediacom TBK (BMTR). The everchanging digital streaming landscape and its massive growth create both an opportunity and threat for the company’s growth. The study aims to analyse stock valuation and performance of digital media in Indonesia pre-pots pandemic. To analyse this, the study utilized secondary data from the company’s annual report and various secondary sources. The data is processed using absolute valuation method of Discounted Cash Flow valuation and relative valuation method of Price-to-Earnings Ratio, Price-to-Book Value and EV/EBITDA. Using the absolute valuation method, it is found that the company’s stock is currently overvalued with an intrinsic value of Rp 169 in comparison to the actual price of Rp 278. One of the reasons for this is the company’s high beta stock of 1.8 which could signal a higher risk but higher return. Using the relative valuation method, all the metrics found that BMTR stock is undervalued. Being constantly below the industry average. However, the financial analysis as well as the relative valuations has found that the company is the most stable out of all the Indonesian listed digital streaming companies. This demonstrates the excellent business performance of the company.

Analisis Fundamental untuk Memperoleh Nilai Wajar Saham SMDR dengan Metode Free Cash Flow to Equity dan Price Earning Ratio

Investors or parties who invest in shares, so far have faced obstacles in assessing the fair price of the stock to be purchased. The main cause lies in the limited knowledge or insight in conducting basic or fundamental analysis of the stocks to be purchased. The consequences that are often experienced are investing overvalued, price distortions, rushing to sell back shares so that the investment does not get optimal results. The objective of this paper contributes to analyze the fairness of SMDR's stock (PT. Samudera Indonesia, Tbk.) using the Free Cash Flow To Equity (FCFE) method and the Price Earning Ratio (PER) method, assuming constant economic growth and calculating intrinsic value using a comparison of the two methods. This research is a descriptive study using a quantitative approach. The object of this research is the stock of PT. Samudera Indonesia, Tbk (SMDR). In analyzing, the author will make a financial model with projections for the next 10 years and compare it with the current share price, to find out whether the company's shares (SMDR) are considered fairvalued, undervalued or overvalued. The use of FCFE will be more prominent as of this writing, using a discounted cash flow valuation framework. This research in the form of a fundamental analysis of SMDR shares will be conducted based on published audited financial reports for the years 2016 – 2021. The theoretical benefit of this research is to assist investors in assessing a company's shares, using the FCFE method, in determining investment decisions (buy/hold/sell).

Equity Valuation of Ferrari under Multiple Valuations

This paper aims at determining the stock price of Ferrari, which is a leading company in the luxury performance car industry, to evaluate if it's overpriced or not and discuss the potential limitations of the valuation method. The valuation is based on multiple valuations. The target share price of Ferrari is calculated using the average P/E ratio after identifying Ferrari's comparable peer group. The paper calculates a share price of $91.98, which is significantly less than its current share price of $196.90, based on the P/E ratio valuation. The outcome suggests that Ferrari was expensive. Ferrari's dominant position within the industry as a whole and the inherent flaws in the valuation mechanism is the key factors influencing this. To have a better understanding of the company itself, more models, such as discounted cash flow valuation, are advised. P/E ratio valuation can be employed as an initial screening technique. This essay offers some insights into Ferrari and the entire high-performance automobile market, which can be helpful when calculating the share prices of top firms like Ferrari.

Managerial market timing under credit risk: How do timed buybacks and stock issuances influence the value of long-term shareholders?

Using discounted cash flow valuation together with a Merton-style credit risk model this paper quantifies the effects of credit risk on timed equity buybacks and issuances. Assumed managers act in best interest of their long-term shareholders and do have superior information, the potential value gain for long-term shareholders out of market timing with and without credit risk is evaluated. As demonstrated in a real-world example, credit risk is important. Ignoring credit risk results in value gains of buybacks motivated by smaller (larger) mispricing levels being underestimated (overestimated), while value gains of issuances driven by lower (larger) mispricings are overestimated (underestimated). These effects are stronger for firms with higher debt levels.

Should One Assume the Discount Rate to Be One of the Risk Factors?

The Monte Carlo simulation is the ultimate solution for considering nearly all possible scenarios in presumably any discounted cash flow valuation. This paper argues that a discount rate expresses an investor’s current requirement and should be respectively perceived as a parameter only. The consequences of qualifying a required rate of return (a discount rate) as a risk factor in a discounted cash flow valuation are described in the paper using a free cash flow financial model of an asset being a hypothetical publicly traded enterprise. The case study is a discounted cash flow valuation using the Monte Carlo simulation for risk analysis. The various sets of assumptions are considered to explain the consequences of qualifying a required rate of return in a discounted cash flow model as a risk factor. As indicated in the paper, the discount rate as an additional risk factor with an attributed probability distribution increases the volatility of a risk variable, then the distribution of a risk variable becomes more flattened. In previous studies, some authors indicated that a discount rate could be considered a risk factor in the Monte Carlo simulation (Krysiak 2000; Damodaran 2018).

The Black Scholes Model and Discounted Cash Flow Valuation

The Black Scholes Model and Discounted Cash Flow Valuation

A synthesized distribution model: Asymmetric information, agency problem, and intertemporal optimization

A firm’s policy of distribution over current and future time periods influences the capital structure of the firm and its profitability. Managers decide on the amount of effort input in such a context of financial structure to maximize their utility. Nevertheless, shareholders’ preferred distribution of income is determined by the goal of corporate value maximization. The study aims to reach an optimal level of income distribution and reinvestment over current and future periods in which both the manager’s utility and shareholders’ corporate value have been maximized. The study adopts Lagrange’s multipliers method and the discounted cash flow valuation model of corporate value maximization. By processing a method of mathematical deduction and optimization, the study aims to reach an optimal equilibrium level of the dividend distribution model and explore key factors in the model for the determination of the distribution of income. As a result, the study concluded an optimal dividend distribution model, in which six factors jointly determine a theoretical equilibrium of optimization. These factors consist of the capital structure of the firm, the tax shield from debt financing, the growth rate of the dividend, dividend tax, the investment strategy of the principal, and the cost of capital.

A Case Study on Valuation of Tata Motors Ltd.

In this case study, the fundamental value of Tata Motors has been calculated using one of the most popular techniques of valuation, Discounted Cash Flow Valuation. Ravi Nigam, who is an equity analyst has been given the task to calculate the value of Tata Motors. The first step taken to calculate the value was to prepare the forecasted income statement and balance sheet. In order to do so, the first task was to forecast the sales of Tata Motors for the next coming five years. On the basis of forecasted sales, various items of expenses like the cost of goods sold and selling, general &amp; administrative expenses were forecasted. Subsequently, Free Cash Flow to the Firm was calculated which was discounted by a weighted average of the cost of capital to arrive at the present value of Tata Motors. The terminal value and its present value has been also calculated to complete the valuation process.

Sustainable Finance: ESG/CSR, Firm Value, and Investment Returns*

AbstractWe review the burgeoning sustainable finance literature, emphasizing the value implications of ESG (environmental, social, and governance) and CSR (corporate social responsibility) practices. We use a discounted cash flow valuation framework to identify value drivers through which such practices can enhance firm value. Collectively, empirical evidence supports that they increase firm value by motivating employees, strengthening customer–supplier relationships, boosting long‐term growth, increasing dividends, and reducing financing costs. Furthermore, more socially responsible firms deliver no higher excess stock returns in the long run. Green bonds neither provide issuers with a price premium nor make investors sacrifice on lower returns. Socially responsible investing (SRI) funds generate no higher risk‐adjusted long‐term returns than non‐SRI funds. Finally, we briefly suggest several topics for future research on sustainable finance.

Firming merchant renewable generators in Australia’s National Electricity Market

Global decarbonisation is driving investments in intermittent renewable generation, with most plant entering the market by way of a Power Purchase Agreement. In Australia’s National Electricity Market, a surprising number of renewable generators have entered on a merchant basis. To maintain tractable revenues some minimum level of hedging is required, but in an energy-only electricity market with a very high market price cap, merchant intermittent generators require some level of associated firming capacity to ensure spot price exposures can be adequately managed. This article uses unit commitment, battery arbitrage and stochastic discounted cashflow valuation models to compare an Open Cycle Gas Turbine and a battery as firming options for a hypothetical wind farm in the South Australian region of the NEM. Using historic market data from 2010–2020, we find OCGT firming capacity helps the wind farm to generate consistent net cash flows, allowing it to withstand the highs and lows of spot market prices whilst covering required contract-for-difference payments associated with hedging. When battery firming is deployed, the wind farm/ battery portfolio generated higher cash flows at specific times, reflecting participation in price arbitrage under low spot price scenarios. However, battery performance was constrained by costly storage capacity.

Taking the highway out: exiting the stock market to maximize results

Theoretical basis The essence of discounted cash flow valuation is simple; the asset is worth the expected cash flows it will generate, discounted to the reference date for the valuation exercise (normally, the day of the calculation). A survey article was written in Parker (1968), where it was stated that the earliest interest rate tables (use to discount value to the present) dated back to 1340. Works from Boulding (1935) and Keynes (1936) derived the IRR (Internal Rate of Return) for an investment. Samuelson (1937) compared the IRR and NPV (Net Present Value) approaches, arguing that rational investors should maximize NPV and not IRR. The previously mentioned works and the publication of Joel Dean’s reference book (Dean, 1951) on capital budgeting set the basis for the widespread use of the discounted cash flow approach into all business areas, aided by developments in portfolio theory. Nowadays, probably the model with more widespread use is the FCFE/FCFF (Free Cash Flow to Equity and Free Cash Flow to Firm) model. For simplification purposes, we will focus on the FCFE model, which basically is the FCF model’s version for the potential dividends. The focus is to value the business based on its dividends (potential or real), and thus care must be taken in order not to double count cash flows (this matter was treated in this case) and to assess what use is given to that excess cash flow – if it is invested wisely, what returns will come of them, how it is accounted for, etc. (Damodaran, 2006). The bridge to the FCFF model is straightforward; the FCFF includes FCFE and added cash that is owed to debtholders.