DCF Calculator

Discounted Cash Flow (DCF) modeling is a valuation method that estimates the intrinsic value of a business by projecting its future free cash flows and discounting them back to today's value using a required rate of return (discount rate). The core idea is that a dollar received in the future is worth less than a dollar today, due to the time value of money and investment risk.

DCF is calculated in three steps: (1) Project the company's free cash flows over a defined period, typically 10–20 years, using an assumed growth rate. (2) Apply a terminal value to capture cash flows beyond the projection period. (3) Discount all those future values back to the present using the WACC (discount rate). The sum of all discounted cash flows, minus net debt, divided by shares outstanding, gives the intrinsic value per share.

Most analysts use the Weighted Average Cost of Capital (WACC) as the discount rate, which typically ranges from 8% to 12% for large, stable companies. Higher-risk or smaller companies may warrant a higher discount rate (12–15%), while exceptionally stable businesses might use a lower rate. The discount rate reflects the minimum return an investor requires to justify the investment risk.

The terminal growth rate represents the rate at which a company is expected to grow in perpetuity after the projection period. It should never exceed the long-term GDP growth rate of the economy — typically 2% to 4% for developed markets. Using a terminal growth rate that is too high can dramatically inflate the estimated intrinsic value and lead to overvaluation.

DCF typically uses Free Cash Flow to the Firm (FCFF), which is the cash a company generates after covering its operating expenses and capital expenditures, but before interest payments. This represents the cash available to all capital providers. Some analysts use Free Cash Flow to Equity (FCFE) when valuing equity directly. The key is consistency between the cash flow measure chosen and the discount rate applied.

The margin of safety is the percentage difference between a stock's intrinsic (DCF) value and its current market price. For example, if the intrinsic value is $100 and the stock trades at $75, the margin of safety is 25%. Value investors like Benjamin Graham popularized this concept — a higher margin of safety provides a buffer against estimation errors and unforeseen risks. Common targets are 20–30%.

DCF is highly sensitive to its assumptions — small changes in growth rate, discount rate, or terminal value can significantly alter the result. It works best for companies with predictable, stable cash flows. For early-stage, cyclical, or cash-flow-negative companies, DCF is less reliable. It should be used alongside other valuation methods (P/E, EV/EBITDA, comparable transactions) to form a well-rounded view.

A stock is considered undervalued when its current market price is significantly below the DCF-derived intrinsic value per share. The greater the gap — i.e., the higher the margin of safety — the more undervalued the stock appears. Conversely, if the market price exceeds the intrinsic value, the stock may be overvalued. Always cross-check DCF findings with qualitative factors like competitive moat, management quality, and industry outlook.