DCF Calculator
Estimate what a business is worth from the free cash flow it can generate, with every step shown. The math runs in your browser; nothing you type is sent anywhere.
How the model works
This is a two-stage discounted cash flow model on free cash flow (FCF):
- Forecast. FCF grows at your year 1-5 rate:
FCFt = FCF0 × (1 + g)t. - Terminal value. After year 5, FCF grows at the terminal rate forever:
TV = FCF5 × (1 + gT) / (r − gT). - Discount.Each year's FCF and the terminal value are divided by (1 + r)t. Their sum is the enterprise value.
- Per share. Equity value = enterprise value − net debt; intrinsic value per share = equity value / shares outstanding.
- Margin of safety = (intrinsic value − price) / intrinsic value.
Worked example(the calculator's starting inputs, in $ millions): FCF of 1,000 growing 10% a year reaches 1,610.51 in year 5. Discounted at 9%, the five years are worth 5,139.31 today. The terminal value is 1,610.51 × 1.025 / (0.09 − 0.025) = 25,396.50, worth 25,396.50 / 1.095 = 16,505.98 today. Enterprise value is 21,645.29; less 2,000 of net debt, equity is 19,645.29. Over 500 million shares that is $39.29 per share, a 10.9% margin of safety at a $35 price.
Why a DCF is so sensitive
In the example, 76% of the value comes from the terminal value, cash flows more than five years away. That is typical, and it means small changes to two guesses, the discount rate and terminal growth, move the answer a lot. Moving the discount rate one point and terminal growth half a point either way spans $31.50 to $51.73 per share, from the same business.
That is why the calculator shows a sensitivity table instead of a single number. Read the value as a range, and ask how much margin of safety you need given how confident you are in the inputs.
Assumptions and limitations
Growth fades. High growth rarely lasts. The model holds your year 1-5 rate constant and then drops to terminal growth, so an aggressive near-term rate inflates the terminal value too. The calculator caps year 1-5 growth at 100% and terminal growth at 10%, and flags terminal growth above 4%, roughly long-run nominal economic growth.
FCF must be positive and representative. Use a normalized figure, not a one-off peak or a year distorted by working capital swings. Negative FCF is refused because compounding it only produces a negative value.
Keep units consistent. Enter FCF, net debt and shares on the same scale (for example all in millions) so that the per-share value comes out in dollars. Use diluted shares, and include leases and pension deficits in net debt if they are material.
Banks and insurers do not fit. For lenders, debt is raw material rather than financing, so free cash flow and net debt lose their meaning. Dividend or excess-return models suit them better.
Frequently Asked Questions
How do you calculate intrinsic value with a DCF?
Project free cash flow for a few years, add a terminal value for everything after, and discount each amount back to today at your required return. That sum is the enterprise value. Subtract net debt to get equity value, then divide by shares outstanding for intrinsic value per share.
What discount rate should I use in a DCF?
The discount rate is the return you require for the risk you take, commonly the company's weighted average cost of capital (WACC). Riskier or more cyclical businesses deserve a higher rate. Because the answer is uncertain, check the sensitivity table rather than trusting a single rate.
Why must terminal growth be lower than the discount rate?
The terminal value is FCF × (1 + g) / (r − g). When g reaches r the denominator is zero and the value is infinite; above r it turns negative. In practice terminal growth should also stay at or below long-run growth of the economy, because no company can outgrow the economy forever.
Can I use a DCF for a company with negative free cash flow?
Not directly. Compounding a negative cash flow only produces a negative value. For a business that is investing heavily or temporarily unprofitable, use the positive free cash flow you expect it to sustain once it matures, or value it another way.
Related
This calculator is for educational purposes only and is not investment advice. Its results depend entirely on the inputs you choose. AlphaStocks is not a registered investment adviser. Do your own research and consult a qualified financial adviser before making investment decisions.