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V7. Introduction to the Discounted Cash Flow (DCF) Model

In order to value an overall company, perhaps the single most rigorous method, is to look at all of the cash flows - over the life of the company and discounting them back to a value for these cash flows today. One can either look at the cash flows to the overall company (and subtract the value of the debt on the balance sheet to arrive at a value for the equity of the company), or one can start by looking at the cash flows to equityholders. This method is rigorous in that it aims to capture a lot of information about the company, far into the future. These cash flows are inherently very difficult to predict, and also, they then need to be discounted at an appropiate discount rate which reflects their risk.
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