![]() ![]() The DCF model is not a perfect stock valuation tool. Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business. Beta is a measure of a stock's volatility, compared to the market as a whole. In this calculation we've used 5.9%, which is based on a levered beta of 0.932. Given that we are looking at Lumen Technologies as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. ![]() If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Relative to the current share price of US$10.3, the company appears quite good value at a 43% discount to where the stock price trades currently. In the final step we divide the equity value by the number of shares outstanding. ![]() The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$19b. We discount the terminal cash flows to today's value at a cost of equity of 5.9%. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.9%. We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars: 10-year free cash flow (FCF) estimate We do this to reflect that growth tends to slow more in the early years than it does in later years. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. To begin with, we have to get estimates of the next ten years of cash flows. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.Ĭheck out our latest analysis for Lumen Technologies The model There's really not all that much to it, even though it might appear quite complex.Ĭompanies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. ( NYSE:LUMN) by taking the forecast future cash flows of the company and discounting them back to today's value. Today we will run through one way of estimating the intrinsic value of Lumen Technologies, Inc. ![]()
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