discussion financial management

Why do Investors and Companies Care about Intrinsic Value?

The intrinsic value of a firm is determined by the size, timing, and the risk of its expected future free cash flows (FCF). There are two models used to estimate intrinsic values: the discounted dividend model and the corporate valuation model.

The discounted cash flow (or DCF) approach describes a method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flows are estimated and discounted to give their present values. The discount rate used is the appropriate cost of capital and may incorporate judgments of the uncertainty (riskiness) of the future cash flows.

The corporate valuation model – involves estimating the worth or price of a company, one of its operating units, or its shares. There are many reasons for the valuation: the purchase or sale of the business, mergers, and acquisitions, buy-back agreements, expanding the credit line, or tax matters.

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