What is a discounted cash flow (DCF) model?

A DCF model estimates the intrinsic value of a business by projecting future cash flows and discounting them back to today using a required rate of return. It combines explicit cash flow forecasts with a terminal value that represents cash flows beyond the forecast horizon.

Which cash flow should I use?

Many investors use free cash flow to equity or free cash flow to the firm, depending on the valuation approach. For educational purposes, you can use any consistent measure of owner earnings or free cash flow.

How do I choose a discount rate?

The discount rate should reflect your required rate of return given the business’s risk. Some investors use the weighted average cost of capital (WACC); others use a personal hurdle rate such as 8–12%.

What is terminal value?

Terminal value represents the value of cash flows beyond the explicit forecast period. In this tool, it is computed using a Gordon growth model: Terminal value = Final year cash flow × (1 + g) ÷ (r − g), where g is terminal growth and r is the discount rate.

DCF is highly sensitive to assumptions about growth, margins, and discount rates. It is best used as a framework for thinking about value rather than a precise prediction. Small changes in inputs can lead to large changes in estimated value.

Stock Valuation DCF Tool

Estimate intrinsic value per share using a discounted cash flow model. Project cash flows, apply a discount rate, and see a full valuation breakdown.

Starting annual cash flow (FCF) Cash flow growth rate (% per year) Explicit forecast years

Discount rate (% per year) Terminal growth rate (% per year) Net debt (debt − cash)

Shares outstanding Current share price Margin of safety (%)

Tip: Use conservative growth and terminal assumptions; DCF is highly sensitive to inputs.

Important: This DCF tool is for educational purposes. Real‑world valuation should consider multiple scenarios, capital structure, taxes, and more detailed modeling.

DCF valuation formulas

A discounted cash flow model estimates intrinsic value by projecting future cash flows and discounting them back to the present. This tool uses a simple single‑stage growth model for the explicit period and a Gordon growth model for terminal value.

1. Projected cash flow for year t

CFₜ = CF₀ × (1 + g)ᵗ

Where:
CF₀ = Starting cash flow
g   = Annual growth rate
t   = Year index (1, 2, …, N)

This formula grows the starting cash flow at a constant rate g for each year in the explicit forecast horizon.

2. Present value of each cash flow

PV(CFₜ) = CFₜ ÷ (1 + r)ᵗ

Where:
r = Discount rate (required rate of return)

Each future cash flow is discounted back to today using the required rate of return. Higher discount rates reduce present value.

3. Terminal value (Gordon growth)

TV = CF_N × (1 + gₜ) ÷ (r − gₜ)

Where:
CF_N = Cash flow in final forecast year
gₜ   = Terminal growth rate
r    = Discount rate

Terminal value represents the value of cash flows beyond the explicit forecast period, assuming a constant terminal growth rate.

4. Equity value and value per share

Equity value (PV) = Σ PV(CFₜ) + PV(TV) − Net debt

Intrinsic value per share = Equity value ÷ Shares outstanding

Net debt adjusts enterprise value to equity value. Dividing by shares outstanding yields intrinsic value per share.

These formulas provide a clean, intuitive DCF framework. In practice, investors may use multi‑stage growth, changing margins, and scenario analysis, but this structure is a solid starting point for understanding valuation.

How to think about DCF‑based stock valuation

Discounted cash flow analysis is one of the most conceptually rigorous ways to value a business. Instead of focusing on multiples or recent price action, DCF asks a simple question: how much cash can this business generate over time, and what is that stream of cash worth today given the risk?

Choosing the right cash flow

The first decision is which cash flow to model. Many investors use free cash flow to equity (after interest and principal payments) or free cash flow to the firm (before financing decisions). For educational purposes, you can treat “cash flow” as owner earnings—cash that could be distributed to shareholders without harming the business.

Consistency matters more than perfection. If you start with a conservative estimate of current free cash flow and apply realistic growth assumptions, you will get a useful sense of how sensitive value is to your inputs.

Growth, discount rate, and terminal assumptions

DCF is extremely sensitive to growth and discount rates. A small change in growth can dramatically change the terminal value, and a small change in discount rate can significantly alter present value. That’s why many investors prefer to err on the side of caution: lower growth, higher discount rates, and modest terminal growth.

For example, a mature company might be modeled with 3–5% growth for a few years and a terminal growth rate below long‑term GDP growth. A riskier, faster‑growing company might use higher near‑term growth but still revert to a conservative terminal rate.

Net debt and equity value

Once you have the present value of cash flows and terminal value, you adjust for net debt. If the company has more debt than cash, you subtract net debt from enterprise value to arrive at equity value. If it has net cash, you add that to the present value of cash flows. This step connects the DCF to the actual capital structure.

Worked example

Imagine a company with:

Starting free cash flow: $5,000,000
Growth rate: 8% per year
Forecast horizon: 10 years
Discount rate: 10% per year
Terminal growth: 2% per year
Net debt: $10,000,000
Shares outstanding: 50,000,000

The tool will project cash flows for each year, discount them, compute terminal value, discount that, subtract net debt, and divide by shares. You’ll see intrinsic value per share and implied upside relative to the current price you entered.

Margin of safety and decision‑making

Many value investors use a margin of safety—buying only when the market price is significantly below their conservative estimate of intrinsic value. The margin of safety input in this tool lets you see a “target buy price” that reflects your desired buffer. If the current price is above that level, you might wait; if it’s below, you might consider the stock more attractive.

Practical tips

Use conservative assumptions; it’s better to be roughly right than precisely optimistic.
Test multiple scenarios (higher/lower growth, different discount rates) to see how sensitive value is.
Remember that DCF is one tool among many—combine it with qualitative analysis and risk assessment.
Use the CSV export to store your valuation runs and compare them over time.

DCF won’t tell you exactly what a stock is “worth,” but it will force you to articulate your assumptions and see how they translate into value. That discipline is often more valuable than any single number.

Frequently Asked Questions

How many years should I forecast?

Many investors use 5–10 years for explicit forecasts. Shorter horizons reduce sensitivity to long‑term assumptions but may understate value for durable compounders.

Can I use negative net debt?

Yes. If the company has more cash than debt, net debt is negative. The tool will add that net cash to the present value of cash flows when computing equity value.

What if growth is not constant?

This tool uses a single growth rate for simplicity. In practice, you might model multiple stages (high growth, fade, stable). You can approximate that by running separate scenarios with different growth rates.

Is terminal growth required?

Yes, for this model. Terminal growth should be conservative—typically below long‑term nominal GDP growth—to avoid unrealistic terminal values.

Does this account for dilution?

The tool uses the shares outstanding you enter. If you expect dilution, you can adjust the share count upward to reflect future issuance.

Can I export the schedule?

Yes. Use the Export CSV button to download the year‑by‑year cash flow and discounting schedule for further analysis.