Discounted Cash Flows: What role in accounting?


The Discounted Cash Flows (DCF), also known as "discounted cash flows  ", are useful in small companies and are a valuation method for companies. For best accountancy training Best school of accountancy In Pakistan. It consists of determining the future earnings of an entity and updating them to determine its value at a given time.
Discounted cash flow - Longuemart
The calculation of Discounted Cash Flows
The Discounted Cash Flows method is a rather complex accounting method . Indeed, calculating the value of the company requires several steps: determination of cash flows, updating and addition of the final value .
Where F is the net cash flow, K is the discount rate expected by the shareholder and V is the final value of the company.
To calculate net cash flows (F), a horizon (4 to 10 years) should be used and the formula should be applied:
Cash Flows = EBITDA - Corporate income tax - change in working capital - investments + divestments
To define the discount rate (K), it is de rigueur to assimilate it to the weighted average cost of capital which is calculated as follows:
Cost of own funds * Shareholders 'equity / (Financial debts + Shareholders' equity)
+ Cost of financial debt * (1 - corporate tax rate) * Debts / (Shareholders' equity + Debt)
The terminal value of the company is calculated according to the formula of Gordon Shapiro:
Dividends / (K - annual dividend growth rate)
The interest of Discounted Cash Flows
Using the DCF method, it is therefore possible to evaluate a company based on the assumption that the company is worth what it will yield in the future.
Also, as is the case with the net asset method, it can not be applied to all types of structures. The DCF method is thus particularly adapted to determine the value of companies with high growth potential or present in markets where development opportunities are important. Start-ups or companies wishing to raise funds to carry out new projects can thus be evaluated with the DCF.

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