Discounted Cash Flow
A valuation methodology which calculates the present value of a business based on all future cash flows expected from the business. After the expected cash flows are determined for a period of time, the residual value is determined for the business at the end of that period of time. Then the expected cash flows are discounted, usually based on a fixed percentage discount that is annually compounded. To determine the present value of the common equity of a firm using a discounted cash flow model, the expected future free cash flows available to common equity are discounted at a rate equal to the company's cost of equity.