The value of common equity is the present value of expected future dividends plus the present value of the terminal share price of the stock.

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A companys ability to generate free cash flows and pay dividends in the future can be examined using a spreadsheet model with pro forma income statements and balance sheets.

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The value of common equity is the present value of expected future FCFE (Free Cash Flow to Equity).

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In performing discounted cash flow analysis for risky cash flows (i.e., investments with more risk than government debt), two adjustments should be made relative to the risk-free case: First, the expected value of the cash flows, and second, the discount rate for the cash flows.

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DCF analysis involves: (1) choosing the class of DCF model and specific definition of cash flow; (2) forecasting the cash flows; (3) choosing a discount rate methodology; and (4) estimating the appropriate discount rate.

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