DCF Analysis Discounted Cash Flow at Bristol

DCF Analysis

Discounted Cash Flow at Bristol Myers Squibb

In order to achieve a discounted cash flow analysis for equity in Bristol Myers Squibb, the change in equity values from year to year must first be predicted. This was accomplished through a brief analysis of equity levels at the company during a five-year period of observation (2007 to 2011), during which the company had an average (mean) equity growth amount from year-to-year of $1,326.26 (in millions) with a standard deviation of 1005.861. This was used to project equity levels for the next five years, with the expected equity level increased by the mean observed change in equity each year, and with an annual inflation rate of three percent assumed and used to discount the current value of future equity levels. This allows for a sum total of expected equity values over the next five years to be computed, and gives a value for the final equity amount expected at the end of the projected period (2012 to 2016) in both future and current dollars, allowing for a more detailed, nuanced, and reliable estimation of the company's future value.

After expected values for the equity in the company had been established, it was possible to estimate the return on equity (ROE) that would be achieved over the same period. The same basic method was used to measure and project ROE as was used to project future equity levels; ROE was measured over a period of observation and the average (mean) ROE was used as a baseline for future projections of ROE, which were then discounted assuming a three percent inflation rate. The mean ROE for Bristol Myers Squibb over this period of observation (again, 2007 to 2011) was 0.411, with a standard deviation of 0.233. The 0.411 return on equity value was used as a multiplier against the projected expected equity values for each year in the projection period (again, 2012 to 2016) to provide a dollar amount value (in millions) for the return expected in each year. Again, this allowed for both a year-by-year and a cumulative analysis of the expected ROE for the company, providing a much greater level of detail and comprehensiveness than would have been possible in a simpler observational analysis or with more limited analysis.