![]() The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. Compared to the current share price of US$16.0, the company appears about fair value at a 6.0% discount to where the stock price trades currently. To get the intrinsic value per share, we divide this by the total number of shares outstanding. The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$22b. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 11%. In this case we have used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. ![]() We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. ("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$13b Present Value ($, Millions) Discounted 11% Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value: 10-year free cash flow (FCF) forecast We do this to reflect that growth tends to slow more in the early years than it does in later years. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. In the first stage we need to estimate the cash flows to the business over the next ten years. ![]() The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. See our latest analysis for Hewlett Packard Enterprise Step By Step Through The Calculation If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model. However, a DCF is just one valuation metric among many, and it is not without flaws. We generally believe that a company's value is the present value of all of the cash it will generate in the future. ![]() There's really not all that much to it, even though it might appear quite complex. We will use the Discounted Cash Flow (DCF) model on this occasion. Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Hewlett Packard Enterprise Company ( NYSE:HPE) as an investment opportunity by taking the expected future cash flows and discounting them to today's value.
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