We are going to cover valuation techniques in a separate post – but here is the Valuation 101 of how investment bankers determine if a share is currently undervalued or overvalued. We use a piece of financial economics called a discounted cash flow (DCF) model. This is a key part of corporate finance. Now value does not always equal price – but as the Benjamin Graham quote goes, “In the short-term, the market is a voting machine and in the long-term a weighing machine”.
The DCF is the primary method in corporate finance theory for calculating value. In corporate finance – value is a DCF…