DCF: Goal is to calculate the value of the company. Model is used to arrive at the value [1] of the company. The same is compared with the prevailing prices. For the holding horizon [2], latest cash flows (CFs) are compounded at the expected growth rates [3] [educated guess basis inference from the management’s or competitors commentary]. Compounded CFs and terminal value [4] (value,which is also calculated using exit PE multiple, at the end of the holding period) are discounted using aspired equity return rate [5]. Discounted CFs are summed up to arrive at the value of the company. Overall, it calculates parameter 1 by using parameters 2,3,4, and 5.
Reverse DCF: Goal is to calculate the expected growth rate. It considers the value of the company the same as the prevailing prices. Parameter 3 is calculated by using parameters 1,2,4, & 5. Since growth rate [3] is derived, it’s known as IMPLIED growth rate.
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