What is the first step in performing a Discounted Cash Flow (DCF) analysis?

The first step in performing a Discounted Cash Flow (DCF) analysis is to project the company's free cash flows for about five years. This step is crucial as it establishes the basis for estimating the present value of the company's future cash flows, which is the core of the DCF method. By projecting free cash flows, analysts can assess the operating performance of the business, factoring in expected revenue growth, expenses, and changes in working capital.

This projection provides the cash flows that are expected to be generated by the company's operations, which will be discounted back to the present value using an appropriate discount rate. This approach allows for a clearer picture of the intrinsic value of the company based on its ability to generate cash in the future.

The other options, while important components of a complete DCF analysis, occur after this initial step. For instance, determining the terminal value is typically done after projecting free cash flows, and calculating the cost of equity is essential but generally follows the establishment of cash flow projections, as it helps to ascertain the discount rate for the cash flows. Projecting sales revenue is also part of the cash flow projection process but not the first distinct step. Hence, projecting free cash flows is foundational and logically precedes those other steps in