Which items are starting general assumptions for a DCF?

Which items are starting general assumptions for a DCF?

• A. Share Count
• B. WACC
• C. Both Share Count and WACC
• D. None of the Above

Answer: (C)

In a discounted cash flow valuation, two baseline inputs shape the entire calculation: the discount rate and the size of the equity base. The discount rate is the weighted average cost of capital, or WACC, which blends the costs of debt and equity into a single rate used to bring future cash flows back to present value. This rate reflects the overall risk and capital structure of the firm and sets how aggressively you value future cash streams. The other fundamental input is the share count, which determines how total firm or equity value translates into a per-share price. After you arrive at enterprise value (or equity value) from the discounted cash flows, you adjust for debt and cash and then divide by the number of shares outstanding to obtain value per share. Without knowing how many shares exist, the value can’t be presented on a per-share basis; without a discount rate, the future cash flows can’t be valued at present. So both WACC and share count are essential starting assumptions for a DCF, because one sets the value of future cash flows and the other converts that value into a per-share figure.

In a discounted cash flow valuation, two baseline inputs shape the entire calculation: the discount rate and the size of the equity base. The discount rate is the weighted average cost of capital, or WACC, which blends the costs of debt and equity into a single rate used to bring future cash flows back to present value. This rate reflects the overall risk and capital structure of the firm and sets how aggressively you value future cash streams.

The other fundamental input is the share count, which determines how total firm or equity value translates into a per-share price. After you arrive at enterprise value (or equity value) from the discounted cash flows, you adjust for debt and cash and then divide by the number of shares outstanding to obtain value per share. Without knowing how many shares exist, the value can’t be presented on a per-share basis; without a discount rate, the future cash flows can’t be valued at present.

So both WACC and share count are essential starting assumptions for a DCF, because one sets the value of future cash flows and the other converts that value into a per-share figure.