A discounted cash flow valuation answers one question: what is a company worth today, given the cash it will throw off in the future? Strip away the spreadsheet and it's four moving parts. Here's each one — and you can change every input live in the free FundSim DCF calculator.
The logic: a dollar earned five years from now is worth less than a dollar today, because today's dollar can be invested and grow. A DCF takes a company's future cash, discounts each year back to present value, and adds it all up.
Start with unlevered free cash flow (FCF) — the cash the business generates before paying lenders. The standard build:
You project this forward, usually 5 to 10 years, off revenue-growth and margin assumptions.
Each year's FCF gets divided by (1 + WACC)n, where n is the year number and WACC is the weighted average cost of capital. Later years get discounted harder because the exponent grows.
You can't project forever, so after the explicit window you estimate a terminal value — the worth of every cash flow beyond it. Two common methods:
| Method | Formula |
|---|---|
| Gordon growth | Final-year FCF × (1 + g) ÷ (WACC − g) |
| Exit multiple | Final-year EBITDA × an assumed EV/EBITDA multiple |
Terminal value usually makes up the majority of the total — which is why small WACC or growth changes swing the answer so much.
Discount the terminal value back too, add it to the discounted FCFs, and you have enterprise value. Subtract net debt to get equity value; divide by shares outstanding for value per share.