How to Improve the Valuation of DCF Model - a Closer Examination on the Depreciation Rate

DOI

10.2991/978-94-6463-098-5_235How to use a DOI?

Keywords

Discounted Cash Flow; Depreciation; Unleveraged Free Cash Flow

Abstract

Along with the Capital Asset Pricing Model (CAPM), the Discounted Cash Flow Model (DCF) has been widely applied to estimate the common equity of a company. Despite the simplicity of DCF, this valuation model also bears criticism regarding the uncertainty of the estimations and restrictive assumptions that cannot be overlooked while forecasting the free cash flow. However, instead of adopting a more delicate and objective valuation model, this paper emphasizes a simple change within the DCF calculation process. This paper extracts financial information from Zoom Video Communications, Inc., estimates their free cash flows, and compares the DCF price per share with its market price per share as of February 1 2022 and July 1 2022. The conclusion reached by performing the valuation is that in order to achieve a price that is closer to the market expectation under the DCF model, users are suggested to consider encoding the company’s depreciation rate when calculating the unleveraged free cash flow, especially when forecasting a company that is still growing and faces numerous uncertainties.

Copyright

© 2023 The Author(s)

Open Access

Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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TY  - CONF
AU  - Chenxia Du
PY  - 2022
DA  - 2022/12/27
TI  - How to Improve the Valuation of DCF Model - a Closer Examination on the Depreciation Rate
BT  - Proceedings of the 2022 4th International Conference on Economic Management and Cultural Industry (ICEMCI 2022)
PB  - Atlantis Press
SP  - 2093
EP  - 2101
SN  - 2352-5428
UR  - https://doi.org/10.2991/978-94-6463-098-5_235
DO  - 10.2991/978-94-6463-098-5_235
ID  - Du2022
ER  -