ACTIVITY 2

BSAELE03
1. What is DCF?
Discounted Cash Flow (DCF) is a type of financial model that analyse the price of an
investment based on predicted future cash flows. A DCF model also depends on the
premise that a company's value can be determined by its ability to provide future
cash flows for its owners.

2. How DCF approach works?

The DCF method of valuation comprises estimating the future cash flows (FCF) over
the horizon period, determining the terminal value at the end of that time, and
discounting the projected FCFs and terminal value using the discount rate to arrive at
the net present value (NPV) of the future total expected cash flows of the asset or
business.

3. What are advantages and Limitations of DCF approach?

The advantages of DCF Valuation:
DCF valuation should be more resistant to market moods and perceptions because it is
based on an asset's fundamentals. The ideal technique to consider what an investor
would receive when purchasing an asset is through DCF valuation. An investor is forced
by DCF valuation to consider the basic assets of the company and comprehend its
operations.
Limitations of DCF Valuation:
DCF valuation involves a lot more inputs and data than other valuation methodologies
because it aims to estimate intrinsic value. The inputs and data are challenging to
estimate, and a clever analyst can also manipulate them to produce the desired result.
A DCF valuation model may reveal that every stock in a market is overvalued. When
used with distressed companies, companies in cyclical industries, companies with
unused assets or patents, companies undergoing reorganization or acquisition, and
privately held companies, the DCF valuation has some drawbacks.