Dcf of Ge

Following the publications of Copeland, Kaplan and Ruback (94-95) DCF2S has gained momentum and is today’s leading method for company valuation. DCF estimates the intrinsic value of a company based on its cash flow, by estimating FCF and then discounting the future value to present value (because money in the future is worth less than money today).

This paper will perform a Two Stage Discounted Cash Flow company valuation (DCF2S) for General Electric using two different terminal growth rates to illustrate the impact terminal growth can have on the DCF valuations.

* Important question to ask is: “How far out into the future could I do a total line item projection for GE?

* The FCF is the numerator and it must be reasonable to avoid the error of an initial FCF in stage 2 of my analysis.

A 1-2 year EPP will not be applicable for GE because it is restrictive. Additionally, my EPP analysis will need to allow some flexibility and although 2 years is acceptable (accounting budgets are 2 years long) it significantly narrows my horizon with a short term outlook. Conversely, a long term EPP of 7-10 years can be concerning as FCF is the base number so if I have an EPP of 7 years this means Y8 is FCF, and the problem with the formula is we have perpetuity which assumes a company will live forever.

The next step is to forecast the growth revenue over these 5 years taking into account the current market situation and external macro indicators. Below are one analysts forecast earnings for GE for the next 5 years.

| 2011 | 2012 | 2013 | 2014 | 15 (E) | 16 (E) | 17 (E) | 18 (E) | 19 (E) |

NOPAT | 14,414 | 14,847 | 15,475 | 15,457 | 17,002 | 19,553 | 21,508 | 22,583 | 23,712 |

D&A | 6,918 | 6,901 | 7,313 | 6,859 | | | | | |

CF | 21,332 | 21,748 | 22,788 | 22,316 | | | | | |

I | (12,637) | (15,119) | (13,458) | (13,727) | | | | | |

FCF | 8,695 | 6,629 | 9,330 | 8,589 | | | | | |

Historic operating margins- for the past 2 years GEs operating...