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Valuation Lecture 3: DCF, FCFE, and FCFF

This video is a part of online course on Valuation by Professor Aswath Damodaran of NYU. This lecture discusses: DCF, Dividend, FCFE and FCFF models. It also discusses the risk-free rate as an input and the cash flow consistency. The class is currently being taught by Prof. Aswath Damodaran at the NYU’s Stern Business School.

How Do Analysts Select an Equity Valuation Model?

While valuing a stock, the analysts will need to make a choice about which valuation model should they use. This is a difficult but important choice for arriving at the correct valuation. Some analysts will in fact value a stock using multiple models to arrive at a range of stock value. Provided below are a

Equity Valuation – Free Cash Flow Model (FCFE)

We learned about how an analyst can value a stock using the dividend discount model, where the analyst considers the dividends investors expect to receive in the years to come. The idea behind this model is quite intuitive once you understand the concept of time value of money. One problem with dividend discount models is

Free Cash Flow Valuation

FCFF vs. FCFE Definitions FCFF: Free Cash Flows to the Firm are available to both suppliers of equity and debt capital; return of these cash flows to stock and bond investors does not threaten the company’s existence as a going concern. WACC & FCFF: When performing a company valuation using discounted FCFFs, the discount rate