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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: armi who wrote (40815)	12/27/2010 3:39:26 PM
From: Jurgis Bekepuris	Read Replies (2) \| Respond to of 78748

You can use average rates or whatever else you want to use. :) I was just addressing the example you provided. In case of a company, some people use WACC ( Weighted Average Cost of Capital - investopedia.com ). You have to realize that there are two very different ways to use DCF. "Threshold" DCF tries to establish the price at which company purchased now would provide a threshold return (let's say 15%) based on its future cash flows. "Intrinsic value" DCF is what Buffett talks about. It does not predict the price at which you will get some specific return, but rather calculates what is the "intrinsic value" of the company at the present moment based on future cash flows and some kind of cost of capital. I personally don't use Buffett's method. I look at DCF very infrequently and when I do I use a "threshold" DCF, i.e. I use a return threshold (e.g. 15% return) to calculate what would be a good price to pay for company right now. The problem with any DCF is that it's almost impossible to predict the future cash flows, especially in 5-10 years. Read "Buffettology" and you will discover that they suggest that "great moat" companies are preferable because it is easier to predict future cash flows for them. Then look at what their year 2000 10-year predictions would have been for KO, PEP, MSFT or WFC and compare that to actuals in 2009. This exercise might be eye opening. ;) I don't even talk about their "case studies", which are Gannett and Freddie Mac - both Buffett holdings in 1990s... :P