30 years: Financial markets trader
After covering compounding and discounting, Abdulla explains how the discounted cash flow can be used to make a rational investment decision.
After covering compounding and discounting, Abdulla explains how the discounted cash flow can be used to make a rational investment decision.
Subscribe to watch
Access this and all of the content on our platform by signing up for a 14-day free trial.
5 mins 23 secs
We value an equity stake of a company below by finding the present value of its future cash flows and calculating the net present value based on our initial investment.
Key learning objectives:
Learn how DCF is used to make an investment decision
Understand how investors renegotiate an investment opportunity
Access this and all of the content on our platform by signing up for a 14-day free trial.
Discounting future cash flows can be used to determine the viability of a project. As long as the NPV is 0 or positive, investors should consider it. They will need to know the size of the initial investment, the size and timing of cash flows and the discount rate.
Is a 25% equity stake in a company for £15,000 a good investment?
Using as the basis of the valuation:
Using the discounting formula, the total PV of earnings comes to roughly £45,000; so a 25% stake is worth £11,326 – resulting in an NPV of -£3,674 (the PV minus the £15,000 investment). An investor should reject the offer.
An investor would be interested if the initial investment was £11,326 because at that level the NPV would be zero and the investors would be earning the required 10% return. Alternatively, by using the DCF formula, an investor can calculate how big a stake would be worth £15,000. The answer is 33.11%.
Access this and all of the content on our platform by signing up for a 14-day free trial.
There are no available videos from "Abdulla Javeri"