Discounted cash flow (DCF) analysis is a core valuation method in finance. It projects a company’s future free cash flows and then discounts those flows back to the present using a rate that reflects the investment’s risk. Summing those present values yields an estimate of what the company is worth today. Dividing by the number of shares outstanding gives a per-share intrinsic value that investors can compare with the market price.
Free cash flow represents the cash a company can generate after accounting for operating expenses and capital expenditures. Many analysts start with the most recent year’s figure and apply an expected annual growth rate. Growth often slows over time as a business matures, so this calculator uses a simple constant rate for the projection years. You can adjust the rate higher or lower depending on how optimistic you are about future prospects.
The discount rate reflects the required return to invest in the company. It accounts for the time value of money and the risk that projected cash flows may not materialize. The Weighted Average Cost of Capital (WACC) is often used for this purpose, combining the cost of equity and debt financing. Mathematically, each projected cash flow is divided by where is the discount rate and the year.
After the explicit forecast period, analysts assume cash flows grow at a steady “terminal” rate forever. The terminal value formula resembles the present value of a perpetuity: , where is the terminal growth rate and is the first cash flow after the projection period. This value is also discounted back to the present.
Provide the current free cash flow in millions, an expected annual growth rate, your chosen discount rate, a long-term terminal growth rate, the number of years to project, and the number of shares outstanding. After clicking Calculate, the script produces the estimated intrinsic value per share. It also displays a table of yearly projected cash flows so you can see how each contributes to the final valuation.
DCF results depend heavily on the assumptions you enter. Small changes in growth or discount rate can swing the valuation dramatically. The model also assumes a constant growth rate, whereas real companies often experience cycles. Nonetheless, DCF provides a structured framework for thinking about how future cash generation translates into today’s value.
By projecting cash flows and discounting them appropriately, investors can gauge whether a stock appears undervalued or overvalued relative to its current market price. Use this tool to explore scenarios, but remember that real-world investing requires deeper research into business fundamentals and market conditions.
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