![]() To get the intrinsic value per share, we divide this by the total number of shares outstanding. The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is UK£34b. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.4%. In this case we have used the 5-year average of the 10-year government bond yield (1.2%) to estimate future growth. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. ![]() The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. We do this to reflect that growth tends to slow more in the early years than it does in later years.Ī DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars: 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 start off with, we need to estimate the next ten years of cash flows. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. See our latest analysis for BAE Systems The Model ![]() If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in 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. There's really not all that much to it, even though it might appear quite complex. We will use the Discounted Cash Flow (DCF) model on this occasion. Today we will run through one way of estimating the intrinsic value of BAE Systems plc ( LON:BA.) by estimating the company's future cash flows and discounting them to their present value. is UK£10.71 which is 5.2% below our fair value estimate The projected fair value for BAE Systems is UK£11.30 based on 2 Stage Free Cash Flow to EquityīAE Systems' UK£9.27 share price indicates it is trading at similar levels as its fair value estimateĪnalyst price target for BA.
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