Hey fellas, quick question over here.
Let's say I'm building a model for a commonly traded (large cap) company that's very liquid in the market and let's say I have as much information on this company as the rest of the retail investors (basically the public market).
I make my assumptions and project the cash flows etc. and do my DCF. Eventually I get to the equity value from the enterprise value after making the appropriate adjustments.
Is it correct for me to say that the equity value I derive from my DCF should be pretty close to the market capitalisation of said company (market value of equity)? And if it differs significantly, it is more likely that my assumptions could be improved?
Well, I'm under the impression that net net, the market should value the company rather accurately and since i do not have more information than the market, I assume by DCF should have assumptions that give me an equity value that is close to the market cap. Let me know your thoughts or if I am drastically off tangent.
Cheers!
A DCF valuation is just one of many valuation tools, and its result is highly sensitive to its assumptions. With that said, if you are using standard figures for your calcs (e.g., if you use management estimates), you might get results that are similar to most others' estimates, and that may be close to the market value.
The real question is what do you value a security at? If you are comfortable with your earnings estimates, what are you willing to pay for those returns? 5x? 10x? 20x? In the end, value is only what a given investor will pay for a security and the meeting price at which another investor will sell the same security. If the stock hits your targeted price, and you valued it substantially different than the vast consensus, who was wrong?
I understand where you're coming from and your emphasis on the concept of value placed on a security. But what I'm asking is if I casually choose a random security, read its filings or whatever info that is publicly available and do a DCF, it should give me an equity value thats similar to market cap, correct? Anything drastically different is probably an error?
I'm asking this more as a sense check than anything else.
Thanks anyway!
Maybe there's an error. Maybe it's just that your assumptions are vastly different, which is what my point alluded to. If your assumptions were similar to the consensus, then yes, the resulting value, prior to being divided by shares outstanding, would be close to market cap. But that's really not the point. I think college students often have the mindset that there is a set way to do things. It doesn't have to be that way.
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