This excerpt taken from the CVS 8-K filed Feb 13, 2007.
Discounted Cash Flow Analysis
As part of its analysis, and in order to estimate the present value of CVS and Caremark common stock, Lehman Brothers prepared a five-year discounted cash flow analysis for CVS and Caremark, calculated as of December 31, 2006, of after-tax unlevered free cash flows for fiscal years 2007 through 2011. Lehman Brothers decision to prepare a five-year Discounted Cash Flow analysis was based on Lehman Brothers expertise and familiarity with CVS and Caremark, and the drugstore and pharmacy benefit management industries generally, as well as generally accepted fundamental valuation methodologies for stable-growth companies like CVS and Caremark.
A discounted cash flow analysis is a traditional valuation methodology used to derive a valuation of a business by calculating the present value of estimated future free cash flows of the business. Present value refers to the current value of future cash flows and is obtained by discounting those future cash flows by a discount rate that takes into account macro-economic assumptions and estimates of risk, the opportunity cost of capital, expected returns and other appropriate factors. Lehman Brothers performed a discounted cash flow analysis for each of CVS and Caremark by adding (1) the present value of the applicable companys projected after-tax unlevered free cash flows for fiscal years 2007 through 2011 to (2) the present value of the terminal value of the applicable company as of 2011. Terminal value refers to the value of all future free cash flows to be derived from a business at a particular point in time.