What is DCF valuation?
DCF (Discounted Cash Flow) is a valuation method that estimates a company's worth by projecting future free cash flows and discounting them to present value using WACC.
Discounted Cash Flow (DCF) is the gold standard for intrinsic value calculation:
**The Formula:** DCF Value = Σ (FCF_t / (1+WACC)^t) + Terminal Value / (1+WACC)^n
**Key Components:**
1. **Free Cash Flow (FCF)** - Operating Cash Flow - Capital Expenditures - Project 5-10 years based on growth assumptions
2. **Discount Rate (WACC)** - Weighted Average Cost of Capital - Combines cost of equity (CAPM) and cost of debt - Typically 8-12% for most companies
3. **Terminal Value** - Value of all cash flows beyond forecast period - Gordon Growth: FCF × (1+g) / (WACC - g) - Terminal growth usually 2-3% (GDP growth)
**Strengths:** • Theoretically sound - values future cash • Captures growth and risk explicitly • Industry standard for M&A
**Weaknesses:** • Sensitive to assumptions (small changes = big impact) • Difficult for unprofitable companies • Terminal value often dominates (we cap at 70%)
Intrinsic Investor runs DCF with Monte Carlo simulation to show uncertainty ranges.
Source: Intrinsic Investor (https://www.intrinsic-investor.com)
This answer is for educational purposes only, not investment advice.