How to Code a Discount Cash Flow Model in Python - Part 2

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This python coding tutorial reviews how to create a discount cash flow model to estimate the intrinsic value of a stock. In this coding tutorial, we estimate the intrinsic value of Apple $AAPL stock.

The Discounted Cash Flow (DCF) model is a financial valuation method used to estimate the intrinsic value of an investment, company, or asset by predicting its future cash flows and discounting them back to their present value. The idea is to determine the value today (present value) of cash flows that the asset is expected to generate in the future.

Key Components:
Future Cash Flows: These are the projected free cash flows (usually operating cash flow or net income adjusted for capital expenditures and changes in working capital) that the asset or company will generate over a specific forecast period.
Discount Rate: This is the rate used to convert future cash flows into their present value. The discount rate typically reflects the time value of money, and the risk associated with the future cash flows. For companies, the Weighted Average Cost of Capital (WACC) is often used as the discount rate.
Terminal Value: Since companies have an indefinite lifespan, the DCF model often includes a terminal value at the end of the forecast period, which captures the value of all cash flows beyond that period.
Present Value: After future cash flows and the terminal value are estimated, they are discounted back to the present using the discount rate. The sum of the present value of all projected cash flows gives the intrinsic value of the investment or company.

Purpose:
The DCF model helps investors determine whether an asset is overvalued or undervalued by comparing its intrinsic value to its current market price. If the DCF value is higher than the current price, the asset may be undervalued, and vice versa.

This coding tutorial is a two-part series. In the part 1, we will gather historic free cash flow data from yahoo finance using the yahooquery python library. We will use this historic free cash flow data to calculate the average growth rate. This average growth rate forecasts the future free cashflow the company may generate. Check out part 1 here:    • How to Create a Discount Cash Flow Mo...  

In this part 2 video, we will then create a custom discount cash flow python function. We will web scrape the outstanding number of shares in the markets for a stock using the beautifulsoup python library. We also calculate the present value and terminal value based on the free cash flow forecasted from part 1.

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