Question:What is discounted cash flow?

Discounted cash flow or DCF is what a person is willing to pay right now. This has too be done in ordered to receive the cash flow that is anticipated in future years.

Discounted cash flow is an approach to valuation that is useful in determining just how attractive a particular investment opportunity is likely to be for a given investor. The idea behind this type of calculation is to help an investor cho...

It is a hypothetical value measurement tool using a companies projected sales and revenue from the future and backdated into the present.

What do investors use to value a stock? discounted cash flow or trading multiples?

Q: I am from Corporate Finance and I would want to understand which metrics buy-side investors use in order to choose a stock they would want to invest in? Do investors value companies by using DCF or market multiples? How much discount (in percentage) do investors require to say that a stock is undervalued?

A: The approaches vary. But it is safe to say that many buy-siders have dispensed with valuation altogether in favor of screening. Benjamin Graham, for example, recomended to buy stocks that meet all of the following criteria:E/P > 2 x AAA corporate bond yieldP/E < 40% of the average P/E for all stocks over the last 5 yearsDividend Yield > 2/3 x AAA corporate bond yieldPrice < 2/3 of Tangible Book Value [See Note 1]Price < 2/3 of Net Current Asset Value (NCAV) [See Note 2]Debt to Equity Ratio (Book Value) < 1Current Assets > 2 x Current LiabilitiesDebt < 2 x Net Current AssetsHistorical Growth in EPS (over last 10 years) > 7%No more than two years of declining earnings over the previous ten yearsNote 1. Tangible Book Value is computed by subtracting the value of intangible assets such as goodwill from the total book value.Note 2. Net Current Asset Value (NCAV) is defined as liquid current assets including cash minus current liabilities.Other investors use their own screens. Joel Greenblatt, for example, recommends the following approach: 1. Define your target universe.2. Rank all stocks in your target universe by return on capital (the highest return gets rank 1, the second-highest, 2, and so on).3. Rank all stocks in your target universe by earnings yield (the highest yield gets rank 1, the second-highest, 2, and so on).4. Add two ranks together for each stock. 5. Buy stocks with the highest combined rank.