DCF and Future Share Price
So hypothetically if you calculate the fair value of the share price of a company to be $100 using the DCF model and a discount rate of 10% over a 10 year period, would that mean by the end of the ten years, if the actual share price of the company fell in line with your predictions, the share price would increase by 10% annually, so by the end of the 10 year period in this case the share price would be $253? Thanks.
Your share price would increase because you've earned the equity upside after your cash flows have come in over those years. You have to remember that it's based on projections off of your cash flows. At the end of year 10 to get a share value, you need to project out another 10 years and so on. Your projections would have to be consistent throughout. At this point, you should use the perpetuity formula
So say I calculated the fair value using the perpetuity formula, would that mean each year the share price should increase by 10%, if I bought at fair value and my predictions are correct, and if I, like I said earlier, calculated this over a 10 year period, the share price at the end would by fairvalue*1.1^10?
If the capital structure remained similar and all else equal yadda yadda, it should go up by the equity cost of capital which represents expected returns for equity investors. Not the blended discount rate including debt cost of capital. So it should grow faster than 10%
So in this example:
Say I calculated the fair value using the perpetuity formula, would that mean each year the share price should increase by 10%, if I bought at fair value and my predictions are correct, and if I, like I said earlier, calculated this over a 10 year period, the share price at the end would by fairvalue*1.1^10?
You're saying it would grow at a rate higher then 10%? If so what's the best way to predict the companies share price in 10 years? Thanks.
When you say discount rate do you mean equity cost of capital or wacc? If waac, it's the enterprise value that increases by 10% p.a. And since equity is lvered you generate higher than 10% returns. If it's the equity cost of capital you are referring to, then share price should go up by 10% p.a.
Dude why do you always post asking people to do your homework?
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