Getting 1-year price target from DCF
Hi everyone, I got the implied share price (current price) from a DCF, but I was wondering how to get the price target within a year based on this? That is the 1-year price target. Sorry to ask such a dumb question.
My question is if I want to get a 2024 (next year) target price, then how do I adjust for this?
Current implied share price from the DCF is $30
WACC = 20%
Cost of equity = 19% (company basically not levered)
Cost of debt = 1%
I want the model to produce a price target for next year (2024) - then should I multiply this by (1+WACC) or (1+Cost of equity)? Or how should I derive the 1-year price target? Thank you so much!!
The latter - (1 + Cost of Equity). By holding on to that share for one year, you are taking equity risk.
Thank you very much! Makes sense
Do you personally apply this tho when trying to get 1-year price target from DCF? Just trying to think what's the best way to derive a 1-year price target..
Make the DCF as of one year from now. You're standing at the end of 2024 with the 2024 FCF already earned and so not reflected in your analysis. Your DCF should be the discounted cash flow of 2025, 2026, 2027, and so on plus your perpetuity terminal value, discounted back to YE2024 (not YE2023), and you should use YE2024 share count and net debt.
In your case, using Ke (cost of equity) to find FCFE.
If the firm has significant leverage or undergoing capital structure changes or unstable cash flows, then FCFF would be preferred and you would use WACC.
Quick way to remember this notion is just understanding what WACC means (weight avg. cost of capital) - it includes all cost of capital: equity and debt. If debt is not an important factor when analyzing a firm’s equity, solely consider Ke.
You made a math error. WACC should be somewhere in between cost of equity and cost of debt
Multiply by (1+CoE) and subtract DPS
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