Using Discounted Cash Flow

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Introduction This assignment is to analyse and discuss the use of Discounted Cash Flow "DCF" to value Henkel AG. Discounted Cash Flow Valuation is based upon the notion that the value of an asset is the present value of the expected cash flows on that asset, discounted at a rate that reflects the riskiness of those cash flows. Specify whether the following statements about discounted cash flow valuation are true or false, assuming that all variables are constant except for the variable discussed (Rubinstein, 2003). As described by Emhjellen and Alaouze (2003), the discounted net cash flow is one of the most popular tool used for finance valuation. The assignment will specifically discuss three key areas to DCF; Cost of Equity,…show more content…
The usual method of selling equity in a company is to sell shares of stocks. Selling equity provides the advantage that dividends will result on profitability. However, there 's huge advantage that shareholders will expect a continuous return on their investment and if any stock fail it will be sold off which in return will devaluate the company (Brigham and Ehrhardt, 2009). Risk Free Rate The risk free rate is defined as the return on a portfolio or security that has no covariance with the market. This is a highly used method for estimating the cost of equity capital. To estimate the risk free rate it’s important to consider government default-risk free bonds since government bonds come in many maturities. The risk free rate reflects three components; the rental rate, inflation, and maturity risk or investment rate risk which are all economic factors that are found in the yield to maturity for any given maturity length. For Henkel AG risk free rate we will use a 10 year bond because it has the least risk. A longer bond give the company a bigger picture of the future, for example 3 to 6 years are not long enough, on the other hand 18 years are too long. We will pick 3.38 because inflation needs time to be more established. Calculation of Treasury Rate: (4.52 + 4.74) / 2 = 4.63 The above results is made by taking in account the rating of Hankel AG, while its rating A which is rated

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