We discount the terminal cash flows to today's value at a cost of equity of 7.6%. 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%. The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. ("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$11b Present Value ($, Millions) Discounted 7.6%
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate: 10-year free cash flow (FCF) forecast 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. Generally the first stage is higher growth, and the second stage is a lower growth phase. We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. See our latest analysis for Chesapeake Energy What's The Estimated Valuation? If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model. However, a DCF is just one valuation metric among many, and it is not without flaws. We generally believe that a company's value is the present value of all of the cash it will generate in the future. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Does the July share price for Chesapeake Energy Corporation ( NASDAQ:CHK) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value.