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We discount the terminal cash flows to today's value at a cost of equity of 8.2%. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.1%. The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. ("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$6.5b Present Value ($, Millions) Discounted 8.2% Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value: 10-year free cash flow (FCF) forecast We do this to reflect that growth tends to slow more in the early years than it does in later years. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. In the first stage we need to estimate the cash flows to the business over the next ten years. Generally the first stage is higher growth, and the second stage is a lower growth phase. We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. See our latest analysis for Snap-on The Method If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model. We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios.

Believe it or not, it's not too difficult to follow, as you'll see from our example!

One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Snap-on Incorporated ( NYSE:SNA) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value.