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DCF
(Discounted Cash Flow)
DCF is a valuation method estimating a company's worth based on projections of future cash flows adjusted for time value of money (discounted to present value). Widely used in M&A and equity research, it represents intrinsic value independent of market sentiment.
The formula sums all future free cash flows (FCF) discounted by the WACC. Key inputs include growth assumptions (5-year projections), terminal value (perpetuity growth method), and discount rate (12% average for equities). While theoretically sound, DCF is sensitive to inputs - small changes can swing valuations by billions. Analysts create multiple scenarios (base/bear/bull cases) to account for uncertainty. DCF works best for stable cash-flowing businesses, not early-stage companies burning cash.
The formula sums all future free cash flows (FCF) discounted by the WACC. Key inputs include growth assumptions (5-year projections), terminal value (perpetuity growth method), and discount rate (12% average for equities). While theoretically sound, DCF is sensitive to inputs - small changes can swing valuations by billions. Analysts create multiple scenarios (base/bear/bull cases) to account for uncertainty. DCF works best for stable cash-flowing businesses, not early-stage companies burning cash.