Welcome one and all to my Simple (and cheap) Discounted Cash Flow (DCF) Spreadsheet Tutorial. The goal of this tutorial is to guide you in building a simple spreadsheet that can be used to calculate the intrinsic value of a stock based on its discounted cash flows. It takes you step-by-step through the process and is intended to be simple enough for just about anyone to follow, even those with no previous spreadsheet experience. I wrote this tutorial as part of my learning process for evaluating stocks, and this is my first extensive experience with using spreadsheets to do financial calculations, so keep that in mind as you find mistakes or wonder why the heck I did something the hard way. My goal is to provide you with the skills to start building or modifying your own valuation spreadsheet.
Don't you love acronyms? DCF, or Discounted Cash Flow valuation, is generally defined as: the amount of money one would pay today for all of the future cash flows of a particular investment. DCF calculations can be used as a tool for estimating the value of a company (or its stock). A DCF calculator, given a set of cash flow estimates, can provide the theoretical current value based on those estimates. In some ways, the final intrinsic value number that pops out of the calculator looks magical, as if Merlin (or is Harry Potter better known these days?) waived his wand and poof!; the magic stock price appeared. Don't become too enamored with this, remember that it is just one part of evaluating a company and it relies on a number of assumptions. This tutorial is not meant to be an in-depth discussion of DCF calculators or business theory in general. Here are a few web sites to visit for more information:
Hmm...the What is DCF? question was certainly understandable, so I will assume this question is just as reasonable. My Webster's Student Dictionary 1996 Edition defines a spreadsheet as, "A kind of computer program that processes numerical data for detailed financial calculations of various kinds." Good enough for me. You have probably heard of the best known spreadsheet, Microsoft's Excel. You may even have it installed on your computer and don't know it or never bothered to run the program, it is part of the Microsoft Office Suite. Or you may be intimately familiar with spreadsheets, all the way from before the Lotus 123 days. If so, why are you reading this section? Skip ahead a few spaces.
If it turns out you don't have Excel (or Lotus 123) and would rather spend your hard earned money on stocks than Microsoft Office, then fear not. In fact, that may be a good thing, because the rest of this tutorial is not going to use Excel (although you can use Excel and easily follow along). Head on over to OpenOffice.org and follow the instructions for downloading and installing the OpenOffice.org suite. It includes the usual suspects, a word processor, a spreadsheet, a presentation tool, etc. Not bad for the price. Alright, have everything installed and ready to go? Excellent, time to head to the first section.