Estimate intrinsic value by discounting projected future cash flows back to present value.
Projected annual growth for forecast period
Long-term sustainable growth (usually 2-3%)
Total debt minus cash
DCF Formula: PV of FCFs = Σ [FCF_t / (1+WACC)^t] Terminal Value = FCF_n × (1+g) / (WACC − g) Enterprise Value = PV of FCFs + PV of Terminal Value Equity Value = EV − Net Debt
How DCF Valuation Works
DCF analysis estimates an investment's value based on its expected future cash flows, discounted back to present value. It's the most fundamental valuation method used by analysts and investors.
Key Assumptions
Growth Rate: Must be realistic — few companies sustain 10%+ growth long-term
WACC: Reflects the riskiness of cash flows; typically 8-12% for most companies
Terminal Value: Often represents 60-80% of total DCF value — sensitivity matters!