You are here, walking someone though a DCF.

Here's a concise walkthrough of a Discounted Cash Flow (DCF) analysis:

1. Project Free Cash Flows (FCFs): Estimate the company's unlevered free cash flows for the next 5-10 years. These are the cash flows generated by the core operating assets after accounting for operating expenses, capital expenditures (CapEx), and working capital needs.

2. Discount the Cash Flows: Use the Weighted Average Cost of Capital (WACC) as the discount rate to account for the time value of money. Discount each year's projected cash flow back to its present value.

3. Calculate the Terminal Value: At the end of the projection period, calculate the terminal value to account for the company's value beyond the forecasted years. This can be done using either:

   • Gordon Growth Model: Terminal Value = Final Year FCF × (1 + Growth Rate) / (WACC - Growth Rate).
   • Exit Multiple Method: Apply a valuation multiple (e.g., EV/EBITDA) to the final year's financial metric.

4. Discount the Terminal Value: Bring the terminal value back to its present value using the WACC.

5. Sum the Present Values: Add the present value of the projected FCFs and the discounted terminal value to get the Enterprise Value (EV).

6. Adjust for Net Debt: Subtract net debt (total debt minus cash) from the EV to arrive at the Equity Value.

7. Calculate Intrinsic Share Price: Divide the equity value by the number of diluted shares outstanding to determine the intrinsic share price.

This method is a cornerstone of intrinsic valuation and is widely used in investment banking, private equity, and corporate finance roles. For more details, check out the DCF Modeling Course or guides on Wall Street Oasis.

Sources: Walk me through a DCF, DCF Modeling Course ~ Pre-training text.pdf, DCF Myth 1: If you have a D(discount rate) and a CF (cash flow), you have a DCF!