![]() ![]() For Callon Petroleum, we've compiled three additional factors you should assess: For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. ![]() It's not possible to obtain a foolproof valuation with a DCF model. Moving On:Īlthough the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business. Beta is a measure of a stock's volatility, compared to the market as a whole. In this calculation we've used 10.0%, which is based on a levered beta of 1.891. Given that we are looking at Callon Petroleum as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. ![]() The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. We do this to reflect that growth tends to slow more in the early years than it does in later years.Ī DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars: 10-year free cash flow (FCF) forecast 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. To begin with, we have to get estimates of the next ten years of cash flows. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. See our latest analysis for Callon Petroleum Is Callon Petroleum fairly valued? If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model. Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. It may sound complicated, but actually it is quite simple! One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Does the July share price for Callon Petroleum Company ( NYSE:CPE) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value.
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