Reviewed by Finin2min Editorial Desk · Last reviewed 11 August 2026
Project free cash flow, discount the explicit forecast and terminal value, then bridge enterprise value to equity value.
DCF assumptions
Enterprise value
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Equity value
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Terminal value share of EV
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Value per share
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Terminal growth must remain below WACC.
How This Is Calculated
DCF valuation projects free cash flows forward over an explicit forecast period (typically capped at a reasonable horizon like 20 years, since longer projections become increasingly unreliable), discounts them to present value using WACC, and adds a terminal value (representing cash flows beyond the explicit period) also discounted back — the sum is the estimated enterprise value.
Frequently Asked Questions
Why is there a maximum reasonable forecast period for DCF?
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Because cash flow projections become increasingly speculative the further out they go — a 20+ year explicit forecast is rarely more reliable than a shorter explicit period plus a well-reasoned terminal value, which is why DCF models typically cap the explicit forecast at a more defensible horizon.
What is terminal value and why does it usually dominate DCF output?
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Terminal value represents the value of all cash flows beyond the explicit forecast period, typically calculated using a perpetuity growth formula. It often represents the majority of total DCF value, which means DCF valuations are highly sensitive to the terminal growth rate and discount rate assumptions used.
Why does WACC matter so much in a DCF?
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WACC is the discount rate applied to all future cash flows — a small change in WACC can significantly change the present value of distant cash flows (and especially terminal value), making DCF output highly sensitive to how WACC is estimated.
Scope: Estimates the intrinsic value of a business or asset using the Discounted Cash Flow method — projecting future free cash flows and discounting them to present value using a chosen discount rate.
Calculation logic
Project free cash flow for each forecast year based on the entered growth assumptions.
Discount each year's projected free cash flow to present value using: PV = FCFt / (1 + r)t, where r is the discount rate (typically WACC) and t is the year number.
Compute terminal value at the end of the explicit forecast period using either the Gordon growth (perpetuity growth) method or an exit-multiple method, as selected, and discount it to present value using the same rate.
Sum all discounted cash flows plus the discounted terminal value to arrive at the estimated enterprise value.
Inputs and assumptions
Growth rates, discount rate and terminal growth/exit multiple are all user-entered assumptions — DCF valuation is highly sensitive to these inputs, and small changes materially change the output.
The discount rate used should reflect the risk profile of the cash flows (commonly the entity's WACC for firm-level DCF).
Exclusions and edge cases
Does not independently derive WACC, revenue projections or margin assumptions — those must be entered by the user or computed separately (e.g., using the WACC calculator).
This is a valuation estimation tool for educational/analytical use, not a substitute for a professional valuation report or fairness opinion.
Sources
No external regulatory source applies — this is a general financial formula, not a statutory computation.
Review status: reviewed and approved by CA Nikhil Gupta on 18 July 2026.