I’m hoping that someone here could help me climb out of this black-hole that I’ve gotten myself into thinking about DCF valuation.
I don’t have a problem with this: If one had perfect foresight into the future, the value of a company today would be its sale price in the distant future, plus all the payouts it has made to its investors, discounted appropriately.
IOW, a stock price ought to be the discounted value of its dividends plus the value of its sale price on a certain future date, discounted to todays date.
DCF does the same by adding up the FCF and the terminal value. The point where I am confused is, why do we add up the FCF’s? if they have not been paid out to the investors. IOW, should it not just be the terminal value discounted to today?
Therefore my question boils down to what is FCF if it is not the dividend?. i.e., If the FCF is not paid out, then by default it is considered reinvested and isn’t that what produces the terminal EPS and futue cash flows?