Discounted Cash Flow

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22 October 2010 What are the valuation guidelines on DCF valuation?

CA Shailesh Kumar Bhagat

CA Shailesh Kumar Bhagat (Expert)
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23 October 2010 The projection of net cash flow generation requires the following analyses or estimates:

• a revenue forecast, based on analysis of the schedule of the subject , the source of revenues

• a cost forecast, based on projections of fixed and variable costs and on cash and noncash costs

• an investment forecast, based on required prospective investments

• a cost-of-capital forecast, based on the capital structure of the busniss, the cost of equity capital for the purchaser (how much the purchaser would earn on the funds if invested elsewhere), and the inherent risk of the busniss (the uncertainty that the purchaser will be able to maintain the current high income level). This has historically fallen in the 14% to 16% range, though increasing uncertainty facing practice buyers is pushing up discount rates.

• an incremental benefit forecast, based on the earnings capacity of the subject busniss relative to the earnings that could be generated from a start-up busniss

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