DCF A Simple Way

TMF has a great article on a simple way to calculate the value of a stock based on the DCF Method. You can read the entire article here. In short:

1\. Cash per Share — [book value per share * total dept/equity]

2\. Take 1. * 0,025 to get the likely interest earned on the cash as part of the EPS

3\. Take the EPS — 2. to get the real company EPS

You might also take other numbers to get an EPS number that you trust to be meaningful for the future earnings of the company. The article takes the EPS from analyst estimates for the current year.

4\. To get the discount rate, the author factors in the beta of the stock. You can do this but many, e.g. Warren Buffet, simply take the long-term government bonds rate if I am not mistaken. You would need to factor in risk above that, which you can do if you believe there is a risk in the stock. But if there is, then you should think twice about investing anyway ;)

5\. Then you need to figure out a growth rate in 5 year intervals for example.

In the end, this is a tool that seems to be easy enough: Try it.

As for the growth “18|5:10|5:6|5:3” would mean that there is 18% growth in the first 5 years, then 10% for the next, then 5% for the next and then 3% for the next.