EV3 DCF Modeling

One equity is valued by discounted cash flow. The inputs are released over the session.

Objective

Value EQ from a discounted cash flow model, and trade against the price. Assessed on profit and loss, with closing positions valued at the final value.

What it shows

• Discounted cash flow: value as forecast cash flows discounted to today.
• Terminal value as the biggest number in the model.
• Inputs released in three steps, so the value is revised as they arrive.

Watch out for

• Spending the session on the spreadsheet and missing the price.
• Treating the first release as final.
• A value that barely differs from the price, leaving nothing to trade.

Who takes part

• Trader — every student. Trades EQ, one equity, with 100,000 in cash.

Class size

Ten to forty students in one role. Students work the model themselves, so a class that can compare answers is the useful one.