A fundamental question: DCF

SlowHabit · #1 09-10-2007, 07:57 AM

What discount rates are you using to figure out a company's intrinsic value? And how did you come up with these numbers [i.e. inflation, sector historical growth]?

I have been reading over Warren Buffett's annual reports but I haven't come across a passage where he gives a hint on how he does it. Perhaps the cat from the desert can brighten my day [img]/images/graemlins/cool.gif[/img]

I admit I'm so giddy right now due to exciting implications.

jumbojacks · #2 09-10-2007, 08:25 AM

What exciting implications??

SlowHabit · #3 09-10-2007, 08:28 AM

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What exciting implications??

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I get really excited when I learn something new. It's probably my motivation for learning things.

jumbojacks · #4 09-10-2007, 08:31 AM

I had a post a while back on private companies: http://forumserver.twoplustwo.com/sh...page=&vc=1

Still looking for that publication...

adios · #5 09-10-2007, 11:38 AM

[ QUOTE ]
What discount rates are you using to figure out a company's intrinsic value? And how did you come up with these numbers [i.e. inflation, sector historical growth]?

I have been reading over Warren Buffett's annual reports but I haven't come across a passage where he gives a hint on how he does it. Perhaps the cat from the desert can brighten my day [img]/images/graemlins/cool.gif[/img]

I admit I'm so giddy right now due to exciting implications.

[/ QUOTE ]

I wouldn't get too excited since this stuff is well known. Anyway this might help:

DCF Analysis: Calculating The Discount Rate

ahnuld · #6 09-10-2007, 11:53 AM

CAPM is a pretty silly way to calculate the discount rate. Volatility in share price really isnt that good an indicator of cash flow risk.

SlowHabit · #7 09-10-2007, 11:55 AM

[ QUOTE ]
[ QUOTE ]
What discount rates are you using to figure out a company's intrinsic value? And how did you come up with these numbers [i.e. inflation, sector historical growth]?

I have been reading over Warren Buffett's annual reports but I haven't come across a passage where he gives a hint on how he does it. Perhaps the cat from the desert can brighten my day [img]/images/graemlins/cool.gif[/img]

I admit I'm so giddy right now due to exciting implications.

[/ QUOTE ]

I wouldn't get too excited since this stuff is well known. Anyway this might help:

DCF Analysis: Calculating The Discount Rate

[/ QUOTE ]
Calculating intrinsic value off generic equations on the internet using the cash flow derived from net income - capital expenditures + amortization + depreciation isn't something to get excited about, though I did anyway when I first started.

The exciting part is I read "The Essays of Warren Buffett" last night and intrinsic value started to make a little more sense [img]/images/graemlins/cool.gif[/img]

SlowHabit · #8 09-10-2007, 12:01 PM

[ QUOTE ]
CAPM is a pretty silly way to calculate the discount rate. Volatility in share price really isnt that good an indicator of cash flow risk.

[/ QUOTE ]
Ahnuld,

Give me some tips in that investment mind of yours!

ahnuld · #9 09-10-2007, 01:53 PM

I may be mistaken but you can just got off some variation of standard CAPM. I mean, generally the risk free rate is always the 10 year yield, and the risk of the market is about 4-5%, so depending on what type of business it is go from there (aka, small drug makers something like 4.4 + (5x2) and a stable company like mcdonalds something like 4.4 + (5x.05))

ahnuld · #10 09-10-2007, 01:55 PM

the thing about CAPM that sucks is if a company (look at USG) gets killed due to some temporary bad news or because of a downturn, its beta goes through the roof. Now you are supposed to say due to the stock markets short term outlook and irrationality the fundamental business has changed? People wont need drywall in the future? To me this makes no sense and thus Beta is pretty worthless when being used to discount cash flows.