DCF Valuation Explained: How to Calculate Intrinsic Value
Discounted Cash Flow (DCF) analysis is the gold standard for estimating a company's intrinsic value. This guide walks through every step — from projecting free cash flow to calculating terminal value and interpreting the results.
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DCF valuation estimates what a company is truly worth by projecting its future free cash flows and discounting them back to today's dollars. The core logic: a dollar tomorrow is worth less than a dollar today. You project free cash flow for 5-10 years, calculate a terminal value (the value of all cash flows after the projection period), discount everything back at the Weighted Average Cost of Capital (WACC), subtract net debt, and divide by shares outstanding to get intrinsic value per share. If the result is above the current stock price, the stock may be undervalued — but DCF is highly sensitive to assumptions, so always use it as a range rather than a precise price target.
Key Takeaways
- • DCF estimates intrinsic value — what a company is worth based on its ability to generate cash, not what the market currently prices it at
- • Terminal value is critical — typically 60-80% of total DCF value comes from the terminal value, not the explicit projection period
- • DCF is assumption-sensitive — a 1% change in the discount rate can change the valuation by 10-15%. Always run sensitivity analysis
- • Best for stable, predictable businesses — DCF works well for mature companies with consistent cash flows but is unreliable for early-stage or cyclical businesses
- • Always cross-check with other methods — use comparable company analysis and precedent transactions alongside DCF to triangulate a fair value range
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Open Dashboard →The DCF Valuation Process
Step 1: Project Free Cash Flow
Free Cash Flow (FCF) is the cash a company generates after accounting for capital expenditures needed to maintain or grow its asset base. The formula is: Operating Cash Flow — Capital Expenditures = Free Cash Flow. Project FCF for 5-10 years based on revenue growth assumptions, margin trends, and capex requirements. For a mature company, assume growth decelerates over time. Ecomerate's financial data pipeline automatically pulls historical FCF and computes growth rates to inform your projections.
FCF = Operating Cash Flow — CapEx | Typical projection period: 5-10 years | Growth decay: 15% → 10% → 5% → 3% (terminal)
Step 2: Calculate Terminal Value
Terminal Value captures the company's value beyond the explicit projection period. The most common method is the Gordon Growth Model: Terminal Value = FCF in final year × (1 + growth rate) / (WACC — growth rate). A conservative terminal growth rate of 2-3% (roughly GDP growth or inflation) is standard. Because terminal value represents such a large portion of total valuation, small changes in the terminal growth rate have an outsized impact.
Terminal value = FCF_forever / (WACC — g) | Terminal growth rate: 2-3% typical | Terminal value often = 60-80% of total DCF value
Step 3: Determine the Discount Rate (WACC)
WACC (Weighted Average Cost of Capital) is the discount rate that reflects the riskiness of the company's cash flows. It's calculated as: (Cost of Equity × Equity %) + (Cost of Debt × Debt % × (1 — Tax Rate)). Cost of Equity is typically calculated using CAPM: Risk-Free Rate + Beta × Equity Risk Premium. For most large-cap US companies, WACC falls between 8-12%. Higher-risk companies deserve a higher WACC.
Risk-free rate: ~4-5% (10yr Treasury) | Equity risk premium: ~5-6% | Typical WACC: 8-12% | Higher beta = higher WACC = lower valuation
Step 4: Discount Cash Flows to Present Value
Discount each projected FCF and the terminal value back to today using the formula: Present Value = Future Value / (1 + WACC)^n, where n is the number of years in the future. Sum all the discounted cash flows plus the discounted terminal value to get Enterprise Value. This is the total value of the business to all capital providers.
PV = FCF_year_n / (1 + WACC)^n | Enterprise Value = sum of all PVs | Higher WACC = lower PV = lower valuation
Step 5: Calculate Equity Value Per Share
To get equity value per share, subtract net debt (Total Debt — Cash) from Enterprise Value, then divide by fully diluted shares outstanding. The formula: Equity Value = Enterprise Value — Net Debt. Then: Intrinsic Value Per Share = Equity Value / Shares Outstanding. Compare this to the current stock price. If intrinsic value is 20%+ above market price, the stock may be undervalued.
Equity Value = Enterprise Value — Net Debt | Intrinsic Value/Share = Equity Value / Shares | Margin of Safety: Buy when price < 80% of intrinsic value
Step 6: Run Sensitivity Analysis
A single DCF output is dangerously precise-looking. Smart investors build a sensitivity table that shows intrinsic value across a range of WACC and terminal growth rate assumptions. This reveals how robust the valuation is — if the stock looks undervalued across most reasonable scenarios, that's a much stronger signal than any single point estimate. Ecomerate's AI Advisor can run sensitivity tables automatically.
Typical sensitivity: WACC ± 1%, terminal growth ± 0.5% | Range of 20-40% is normal | Scenario analysis: base case, bull case, bear case
How Ecomerate Supports DCF Analysis
Ecomerate's platform speeds up every step of DCF valuation:
- 1. Historical Data: Automatically pulls 5 years of free cash flow, revenue, margins, and capex history from SEC filings to establish baselines.
- 2. Projection Templates: Built-in DCF models with analyst consensus estimates for growth rates, margins, and capex requirements.
- 3. WACC Calculator: Computes cost of equity via CAPM using real-time risk-free rates, beta, and equity risk premium data.
- 4. Sensitivity Tables: Generates interactive sensitivity matrices showing intrinsic value across multiple WACC and growth scenarios.
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