DCF Model Price Target
Hello, I was wondering if the price targets from a DCF Model were 1 year/present price targets, or 5 year targets? I was under the impression that its a 5 year target as thats how many years cashflows are generally estimated for. This is probably an extremely dumb question but I can't find an answer and am genuinely curious, thanks.
There aren't dumb questions (might be dumb answers though and you need to watch out for that).
Typically most price targets you see in broker notes are 1-year price targets.
Your DCF might model out cashflows to an infinite horizon in theory - it'll add (A) a 5 (or 10, or maybe something else) year-by-year set of (discounted) cash flows, and then (B) a (again, discounted) "Terminal Value", which in theory accounts for all future cashflows beyond that initial 5 or 10 year period.
The sum of (A) and (B) is, in theory, the total value of all future cashflows from the company, discounted back to today. That (less net debt and some other adjustments), is the equity value of the company today. You can then adjust that by a required return on equity to get an equity value target in one year (which, divided by the number of shares outstanding, is a share price target in one year).
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