valuing a stock using DCF method?

Question

i am trying to value FLR - Fluor using a discounted Cash Flow Method. I have a WACC of 8.3% and a growth rate of 3.5%. My CF for 2006 is 4.43 and expected CF for 2007 is 5.45. What is the stock's intrinsic value today?

Answer 1

$126.72 with WACC of 8.3 and a growth rate equal to future inflation after year one.

I do not think this is an appropriate valuation, however. I would place it at $77.84 because 8.3% is way too low of a discount rate given the likely risk in this firm.

Please note that you should also consider discounting income instead. Income has the advantage, over cashflow, of being similar to the "annual worth method," and does not have the volatility that cash flows possess.

It is true that only cash flow matters, but only cash flow directly to you. If you are not receiving the cash flows, book earnings also include a factor for depreciation. Since this firm has assets that will need replaced, depreciation does seem in practice to mimic the level replacement rate, in the absence of extraordinary inflation. If you do choose to use cash flows, be certain to model negative cash flows from replacement and maintenance costs.

Answer 2

It depends on what you use as a benchmark (the discount rate)

Let's do MCD $48.43(using Yahoo's numbers), using a 5 year AAA bond, which is currently 5.21% (so using a relatively safe investment as a benchmark)

First we calculate the amount of the earnings after 5 years. Currently it earns EPS $1.73, and 7.90% earnings growth.
So: yr1[1.86], y2[2.01], y3[2.17], y4[2.34], y5[2.53]=$10.91 over 5 years.

Then we calculate how much $ in bonds does it take to equal the return in earnings MCD generates. 10.91=5.21%*5(value of bond). So the value of the bond = $41.88

So 1 share of MCD is worth a $41.88 in bonds.

After writing all that stuff.. I realized I wasn't doing DCF.. This is actually some other valuation method.. Woops.. sorry. I'll just leave that up there for you to look at.