What is a DCF valuation?

A discounted cash flow valuation estimates what a business may be worth today by projecting future free cash flow and discounting those cash flows back to the present. It is an intrinsic-value estimate built from assumptions, not a prediction of the market price.

What is the difference between enterprise value and equity value?

Enterprise value is the value of the operating business available to both debt and equity holders. To bridge to equity value, add excess cash and subtract debt and other claims included by the model. Equity value divided by shares outstanding produces an estimated value per share.

Why is terminal value important?

Terminal value represents cash flows after the explicit forecast period. Because a business can continue beyond five forecast years, terminal value can be a large share of a DCF result. That makes the valuation sensitive to the terminal growth rate or exit multiple.

Can a DCF tell me what a stock will do?

No. A DCF is an assumption-driven scenario tool. Growth, margins, reinvestment, discount rates, debt, cash, competition, and share count can all differ from the assumptions. Use a range of cases and compare the result with other evidence rather than relying on one point estimate.

DCF Valuation for Beginners: From Cash Flow to Fair Value

Discounted cash flow (DCF) analysis asks what a business's future cash flows may be worth in today's dollars. The answer is useful only when the bridge from enterprise value to equity value and the assumptions behind it are visible.

Start with free cash flow

Free cash flow is cash a business generates after the operating spending and investment needed to keep running. A DCF projects cash flow for an explicit period, often five years, then discounts each year's cash flow because a dollar received later is less useful than a dollar today.

Present value = Future cash flow ÷ (1 + discount rate)^years

Enterprise value to equity value

Discounted operating cash flows estimate enterprise value, or firm value, which is conceptually available to both lenders and shareholders. The bridge is:

Equity value = Enterprise value + cash − debt
Value per share = Equity value ÷ shares outstanding

Debt should not be subtracted from the operating DCF and then subtracted again in the bridge.

Terminal value beyond the forecast

Terminal value captures cash flows after the explicit forecast period. With the perpetuity-growth method, Terminal value = Year 5 FCF × (1 + g) ÷ (r − g), where g is long-run growth and r is the discount rate. An exit-multiple method multiplies the final cash flow by a selected multiple. Both choices deserve sensitivity testing.

Worked example: why sensitivity matters

Suppose a business produces $10 million of current FCF and the base case produces $180 million of enterprise value. With $20 million of cash, $30 million of debt, and 10 million shares, equity value is $170 million and the estimated value is $17 per share.

Cautious case: 12% discount rate, 2% terminal growth, approximately $11 per share
Base case: 10% discount rate, 3% terminal growth, approximately $17 per share
Optimistic case: 9% discount rate, 4% terminal growth, approximately $27 per share

The range is the point: small assumption changes can create a wide valuation range.

Limits of intrinsic value

Forecast error in revenue, margins, reinvestment, or share count compounds over time.
Terminal value can be most of the result, making long-run assumptions especially important.
Reported cash flow may need normalization for unusual items.
An estimated value is not a timing signal or a prediction of market price.

Frequently asked questions

What is a DCF valuation?: A discounted cash flow valuation estimates what a business may be worth today by projecting future free cash flow and discounting those cash flows back to the present. It is an assumption-driven intrinsic-value estimate, not a prediction of market price.
What is the difference between enterprise value and equity value?: Enterprise value is the value of the operating business available to both debt and equity holders. To bridge to equity value, add excess cash and subtract debt and other claims included by the model. Equity value divided by shares outstanding produces estimated value per share.
Why is terminal value important?: Terminal value represents cash flows after the explicit forecast period. Since a business can continue beyond five forecast years, terminal value can be a large share of a DCF result, making the valuation sensitive to terminal growth or an exit multiple.
Can a DCF tell me what a stock will do?: No. Growth, margins, reinvestment, discount rates, debt, cash, competition, and share count can differ from the assumptions. Use a range of cases and compare the result with other evidence.

Use the DCF intrinsic value calculator to test cash flow, terminal value, cash, debt, buybacks, and a sensitivity matrix. Related: investment fees and inflation-adjusted returns.