Discounted cash flow valuation

- In theory, a company should be worth the discounted value the future cash flows to be generated by the company. A way to look at this directly is to compute the discounted present value of free cash flow. In this context, free cash flow is defined as follows. Cash from operating activities minus cash paid for capital expenditures that's free cash flow. Free cash flow from McDonald's for 2009, 2010 and 2011 is computed as follows. First you've got the cash from operating activities in each year, then you've got the capital expenditures in each year and that gives the free cash flow. 2009 it's $3.8 billion, 2010 $4.2 billion in 2011, a little bit over $4.4 billion. You can see that free cash flow going up each year. In order to use this discount free cash flow model, we need to make forecasts about the following. First, future growth rates in free cashflow. Next, the forecasting horizon. And finally what happens in the…