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a method for estimating a firm's enterprise value by discounting its future free cash flows.

Discounted free cash flow model

enterprise value =

market value of equity + debt - cash

Free cash flow =

EBIT * (1 - tax rate) + depreciation - CapEx - increases in NWC

Discounted free cash flows model

PV(FCF) + Cashat time n - debt at time n/shares outstanding at time n

The cost of capital that reflects the risk of the overall business, which is the combined risk of the firm's equity and debt.

weighted average cost of capital (WACC)

An estimate of the value of a firm based on the value of other, comparable firms or other investments that are expected to generate very similar cash flows in the future.

Method of comparables

A ratio of a firm's value to some measure of the firm's scale or cash flow.

Valuation multiple

The most common caluation multiple?

price-earnings ratio

A firm's earnings over the prior 12 months

trailing earnings

A firm's anticipated earnings over the coming 12 months

forward earnings

A firm's price-earnings (P/E) ratio calculated using trailing (past) earnings.

Trailing P/E

A firm's price-earnings ratio calculated using forward (expected) earnings.

Forward P/E

The tendency of individual investors to trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals.

Overconfidence hypothesis

The tendency to hold on to stocks that have lost valueand sell stocks that have risen in valuesince the time of purchase.

Diposition effect

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