DCF Calculator

What Is Discounted Cash Flow and Intrinsic Value?

Discounted cash flow analysis is the most principled way to estimate what a business is actually worth. The idea is that the value of any asset equals the present value of the cash it will produce over its lifetime. For a company, that cash is its free cash flow — the money left over after it has paid for operations and the investment needed to keep growing. A DCF projects those future cash flows and discounts them back to today, because a dollar earned years from now is worth less than a dollar in hand.

The number a DCF produces is called intrinsic value: the worth justified by the business's fundamentals rather than by market sentiment. Value investors in the tradition of Benjamin Graham and Warren Buffett care about intrinsic value because it gives them an independent yardstick. When the market price falls well below intrinsic value, an opportunity may exist; when it climbs far above, caution is warranted. Intrinsic value is always an estimate, so it should be treated as a reasoned range, not a precise figure.

The Two-Stage DCF Model

A two-stage DCF splits the future into two parts. The first stage is an explicit forecast — typically five to ten years — during which free cash flow grows at a rate you specify. Each year's projected cash flow is discounted individually back to the present and summed. This stage reflects the period over which you can make reasonable, company-specific assumptions about growth.

The second stage handles everything afterward through a single terminal value, which assumes the business settles into a stable, perpetual growth rate. The terminal value is calculated at the end of the projection and then discounted back to today like any other future cash flow. Adding the discounted projection period to the discounted terminal value gives the enterprise value. Subtracting net debt yields the equity value, and dividing by shares outstanding produces the intrinsic value per share.

Terminal Value and the Gordon Growth Formula

The terminal value uses the Gordon growth (perpetuity growth) formula: it takes the final projected free cash flow, grows it by one more year of terminal growth, and divides by the difference between the discount rate and that terminal growth rate. Mathematically this is the value today of a cash flow stream that grows forever at a constant rate. Because the denominator is the gap between the discount rate and terminal growth, that gap must be positive — the discount rate has to exceed the terminal growth rate, or the formula produces a negative or undefined result.

Terminal value usually dominates a DCF, frequently accounting for the majority of total value. That makes the choice of terminal growth rate one of the most consequential assumptions in the entire model. A sensible terminal growth rate is anchored to long-run economic growth — roughly in line with inflation or nominal GDP — because no company can outgrow the whole economy forever. Setting it too high quietly inflates the valuation, which is why disciplined analysts keep terminal growth conservative and test how sensitive the result is to it.

Why the Discount Rate Matters: WACC and CAPM

The discount rate is the engine of a DCF. It represents the return investors require to compensate for the time value of money and the risk of the investment. Most analysts use the weighted average cost of capital (WACC), which blends the cost of equity and the after-tax cost of debt in proportion to how the company is financed. The cost of equity is commonly estimated with the Capital Asset Pricing Model (CAPM), which builds a required return from the risk-free rate, the company's beta, and the equity risk premium.

Small changes in the discount rate move the valuation substantially because every future cash flow is divided by a compounding factor. A higher discount rate penalises distant cash flows more heavily, lowering intrinsic value; a lower rate does the opposite. This sensitivity is why it is good practice to run a DCF across a range of discount rates rather than committing to one. You can estimate the appropriate rate with the related tools below before bringing it back into this model.

To build your discount rate, start with the WACC calculator, which combines the cost of equity and debt into a single required return. The result becomes the discount rate you enter here, closing the loop between cost of capital and intrinsic value.

Garbage In, Garbage Out: The Limits of a DCF

A DCF is only as reliable as the assumptions behind it. Growth rates, discount rates, and terminal assumptions are all forecasts about an uncertain future, and the model amplifies optimism: a slightly aggressive growth rate combined with a slightly low discount rate can produce an intrinsic value far above reality. The precision of the output can create false confidence, so it is wise to treat the result as an estimate within a range and to favour conservative, defensible inputs over flattering ones.

This uncertainty is precisely why value investors insist on a margin of safety: the practice of buying only when the market price is meaningfully below your intrinsic value estimate. The gap absorbs forecasting error and bad luck. A DCF tells you roughly what a business is worth; the margin of safety protects you when your estimate is wrong, which it sometimes will be.

The Valuation Chain: From Cost of Capital to Undervalued

This DCF calculator sits at the centre of a connected valuation workflow. You begin by estimating the cost of equity with CAPM, blend it with the cost of debt to find the WACC, and feed that into the DCF as your discount rate. The DCF then produces an intrinsic value per share, which you compare against the market price through a margin of safety to decide whether a stock looks undervalued, fairly valued, or expensive. Each step builds on the one before it.

You can move through the chain with the related calculators: estimate your required return with the WACC calculator, cross-check the result against a conservative Graham Number for a quick valuation sanity check, apply a margin of safety calculator to size your buffer against the current price, and revisit the underlying time-value mechanics with the present value calculator. Together these tools turn a single intrinsic-value estimate into a disciplined, repeatable process.

Frequently Asked Questions About the DCF Calculator