Equity value is determined by future cash flow projections using net present value. Which technique is this?

Equity value is determined by future cash flow projections using net present value. Which technique is this?

• A. Discounted Cash Flow
• B. Comparables Approach
• C. Financial Statement Analysis
• D. Ratio analysis

Answer: (A)

The idea being tested is valuing equity by projecting future cash that the company can generate and then bringing those amounts back to present value. This is the discounted cash flow method. In a DCF, you forecast the cash flows available to equity (or to the firm) over a set horizon, pick a discount rate that reflects risk (cost of equity or WACC), and sum the present values of those cash flows. Because money received later is worth less today, each future cash flow is divided by (1 + r) raised to the number of periods until receipt, and then all are added up to get today’s value. This forward-looking, NPV-based approach isolates value from expected profitability rather than from current market prices or past performance. The other approaches—using current market multiples from similar companies, or analyzing historical financial statements and ratios—rely on different data and do not directly value equity from projected cash flows.

The idea being tested is valuing equity by projecting future cash that the company can generate and then bringing those amounts back to present value. This is the discounted cash flow method. In a DCF, you forecast the cash flows available to equity (or to the firm) over a set horizon, pick a discount rate that reflects risk (cost of equity or WACC), and sum the present values of those cash flows. Because money received later is worth less today, each future cash flow is divided by (1 + r) raised to the number of periods until receipt, and then all are added up to get today’s value. This forward-looking, NPV-based approach isolates value from expected profitability rather than from current market prices or past performance. The other approaches—using current market multiples from similar companies, or analyzing historical financial statements and ratios—rely on different data and do not directly value equity from projected cash flows.