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Subject:  Re: Discounted Cash Flow Model - Negative FCF Date:  1/31/2011  1:30 PM
Author:  TMFSandman Number:  1627 of 1675

In my DCF valuations I model cash flows explicitly over a 10 year period. So I start with current revenue, and then estimate revenue growth rate, operating margins, tax rates, depreciation, capex needs, and working capital needs over that 10 year period.

For a free cash flow negative company to be worth investing in it must turn free cash flow positive at some point. So now you have to make a case for what will make free cash flow positive. Higher revenue? Expanding margins? Reduced capex? You can plug those estimates into years 1-10 (or however many years you want to explicitly model) and build a model for how free cash flow goes from negative to positive, and then estimate how much the positive free cash flows are worth today by discounting them back at the discount rate of your choice.

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