CFA Lecture

Practical Use of DCF and Economic Rent for insightful Investment Analysis


A discounted cash flow model is a very sophisticated tool. Like a powerful car, it is unadvisable to leave it in anyone’s hands without proper warning.

Any financial analyst is able to make the math work, but we find that common sense and interpretation of the results are sometimes lacking…

A perpetual growth rate of 5% after 10 years… Really??

A nominal discount rate of 9, 10 or 11%... Really??

A DCF with FCF as an input… Really??

In a thought-provoking presentation, we explain how, in our view, such models should be built and interpreted to conduct an insightful financial analysis. We elaborate on how the concept of economic rent is pivotal to a better understanding of companies‘ business models, and how to integrate it into DCF modeling.