DCF Valuation
Learn the most foundational valuation method in finance, then run one live. Input your own assumptions and see intrinsic value calculate in real time.
What is a DCF & Why Use It?
A Discounted Cash Flow (DCF) is a valuation method that estimates what an investment is worth today based on how much cash it's expected to generate in the future. You forecast those future cash flows, then “discount” them back to present value using a required rate of return.
The intuition is simple: a dollar today is worth more than a dollar tomorrow. The DCF formalises that idea across 3–5 years of forecasts, then adds a terminal value to capture everything beyond the projection window.
Stock Valuation
Determine whether a publicly traded company's shares are over- or under-valued relative to your modelled intrinsic value.
M&A Analysis
Price a private acquisition target where no market price exists; the DCF gives you an independent fair value anchor.
Capital Budgeting
Decide whether a new project or investment clears your required rate of return before committing capital.
Key Terms Explained
Before building a DCF, you need to understand what each input means and why it matters.
Free Cash Flow (FCF)
Cash the business generates after operating costs and investments. This is what gets discounted back to today.
WACC
Weighted Average Cost of Capital: the minimum return investors require. Higher risk means a higher WACC.
Discount Rate
Applied to convert future cash flows into present value. Usually set equal to WACC.
Terminal Value (TV)
Lump-sum value of all cash flows beyond the projection window. Typically 60–80% of total enterprise value.
Perpetual Growth Rate (g)
Assumed annual FCF growth rate into infinity. Must stay below long-run GDP growth (≤ 3%).
EBIT
Earnings Before Interest and Taxes. Operating profit before financing costs and tax are deducted.
After-Tax Operating Income
EBIT × (1 − Tax Rate). The pre-cash starting point for FCF.
Enterprise Value (EV)
Total value of the business (debt + equity). Sum of PV of FCFs plus PV of Terminal Value.
Net Present Value (NPV)
Sum of all discounted future cash flows. A positive NPV implies the asset generates value above the required return.
Bridge to Equity
EV minus Net Debt, divided by shares outstanding. Converts enterprise value into intrinsic value per share.
The 5 Steps of a DCF
Every DCF follows the same five-step structure. Get these right and you can value any company.
Project Revenue & EBIT
Forecast revenue for 3–5 years using an assumed growth rate. Apply your EBIT margin to derive operating profit. Use historical performance as a starting point, then adjust for sector trends.
Salesn = Sales0 × (1 + grev)n
EBITn = Salesn × EBIT Margin
- Sales0
- Base year (Year 0) revenue
- grev
- Annual revenue growth rate
- n
- Forecast year number (1, 2, 3 …)
- EBITn
- Earnings Before Interest & Tax in year n
Convert EBIT to Free Cash Flow
Adjust for taxes, add back non-cash D&A, subtract capital expenditures, and account for changes in working capital. FCF is what the business can actually return to investors.
FCF = EBIT(1−t) + D&A − CAPEX − ΔNWC
- EBIT
- Earnings Before Interest and Taxes
- D&A
- Depreciation & Amortization, a non-cash item added back to FCF
- CAPEX
- Capital Expenditures: reinvestment spending
- ΔNWC
- Change in Net Working Capital
Choose a Discount Rate (WACC)
WACC blends the required returns for all capital providers: equity holders and debt holders. A higher-risk business demands a higher WACC, which shrinks the PV of future cash flows.
WACC = (We × Ke) + (Wd × Kd × (1 − T))
- We
- Weight of equity in the capital structure
- Ke
- Cost of equity (e.g. derived via CAPM)
- Wd
- Weight of debt in the capital structure
- Kd
- Pre-tax cost of debt
- T
- Corporate tax rate
Calculate Terminal Value
Because you can't forecast forever, assume FCFs grow at a stable perpetual rate after Year 3. The Gordon Growth Model converts this into a single lump-sum terminal value. WACC must exceed g.
TV = FCFfinal × (1 + g) ÷ (WACC − g)
PVTV = TV ÷ (1 + WACC)³
- FCFfinal
- Free Cash Flow in the final forecast year
- g
- Perpetual growth rate, must be less than WACC
- PVTV
- Present value of Terminal Value discounted to today
Bridge to Equity Value per Share
Sum the discounted FCFs and the PV of Terminal Value to get Enterprise Value. Subtract net debt to get equity value, then divide by diluted shares outstanding.
EV = Σ PV(FCFs) + PVTV
Price = (EV − Net Debt) ÷ Shares
- EV
- Enterprise Value: total value of the business
- Σ PV(FCFs)
- Sum of all discounted Free Cash Flows
- PVTV
- Discounted Terminal Value
- Net Debt
- Total debt minus cash and equivalents
Worked Example
Using the default calculator assumptions: $100M revenue, 5% growth, 10% EBIT margin, 30% tax, 2% D&A, 3% CAPEX, 5% ΔNWC, 8% WACC, 2% perpetual growth, $30M net debt, 10M shares.
All figures in $M unless noted.
| Line Item | Base Y0 | Year 1 | Year 2 | Year 3 |
|---|---|---|---|---|
| Revenue Build | ||||
| Sales | 100.00 | 105.00 | 110.25 | 115.76 |
| EBIT | — | 10.50 | 11.03 | 11.58 |
| EBIT(1−t) | — | 7.35 | 7.72 | 8.10 |
| FCF Build | ||||
| + D&A | — | 2.10 | 2.21 | 2.32 |
| − CAPEX | — | (3.15) | (3.31) | (3.47) |
| − ΔNWC | — | (0.25) | (0.26) | (0.28) |
| = Free Cash Flow | — | 6.05 | 6.36 | 6.67 |
| PV of FCF (@ 8%) | — | 5.60 | 5.45 | 5.29 |
| Valuation Bridge | ||||
| Σ PV of FCFs | 16.34 | |||
| Terminal Value | 113.39 | |||
| PV of TV | 90.01 | |||
| Enterprise Value | 106.35 | |||
| − Net Debt | (30.00) | |||
| ÷ Shares Outstanding | 10.00M | |||
| = Intrinsic Value per Share | $7.64 | |||
Reading the output: $7.64 is the model's estimate of intrinsic value. If shares trade at $6.50, the stock looks undervalued. If shares trade at $9.00, the market is pricing in more growth than this model projects. A DCF is only as good as its inputs, so always stress-test with sensitivity analysis.
Live DCF Calculator
Edit the assumptions below; the model recalculates on demand.
Enter Your Assumptions
Change any value and hit Calculate. The model does the rest.
Revenue Build
Current annual revenue
Annual growth rate
EBIT ÷ Revenue
Corporate tax rate
FCF Build
Non-cash add-back
Capital expenditures
Applied to incremental rev.
Discounting
Must exceed g
Keep below GDP growth (~3%)
Bridge to Equity
Total debt minus cash
Diluted share count
For buy / sell verdict
What To Do With Your Number
Once your DCF produces a price per share, compare it to the current market price and apply this decision framework:
BUY
Intrinsic value > market price by >5%
Your model suggests the stock is undervalued: the market hasn't yet priced in your projected cash flows. Validate with comps before acting.
HOLD
Within ±5% of market price
The market is roughly pricing in what your model projects. Monitor for changes in assumptions, management guidance, or macro conditions.
SELL
Intrinsic value < market price by >5%
The stock appears overvalued relative to your fair value estimate. The market is pricing in more growth than your model projects.
⚠️ Important caveat
A DCF is only as good as its inputs. Never treat your output as definitive. Always run a sensitivity analysis, use conservative estimates, and triangulate with other methods like Comparable Company Analysis (comps). The model is a thinking tool, not an oracle.
Tips for a Better DCF
Because a DCF is built on assumptions, always stress-test your output. The sensitivity table in the calculator above shows how your price per share changes as WACC and perpetual growth rate vary. Here are the rules of thumb professionals use:
- 1Use historical data as your starting point, then adjust for expected changes.
- 2Always be conservative: overly optimistic growth projections are the most common DCF error.
- 3Don't project beyond 10 years; uncertainty compounds rapidly.
- 4WACC must always exceed g, otherwise your terminal value formula breaks.
- 5Keep your perpetual growth rate below long-run GDP growth (typically ≤ 3%).
- 6Terminal value usually represents 60–80% of total Enterprise Value, so take it seriously.
- 7Never forget to subtract net debt (and add cash) when bridging to equity value.