Definition
DCF values an asset or business by discounting expected future free cash flows back to present value and adding a terminal value for cash flows beyond the forecast period.
Formula
Enterprise value = PV(forecast FCF) + PV(terminal value)
Example
If you forecast annual free cash flows and discount them back to today, then add a discounted terminal value, the sum is your enterprise value estimate (before converting to equity value).
How to use it
- DCF is highly sensitive to discount rate and terminal assumptions; always run scenarios.
- Use free cash flow (cash) rather than accounting profit where possible.
Common mistakes
- Using terminal growth that is higher than the discount rate (invalid in perpetuity model).
- Treating a single scenario as a precise estimate (false precision).
Measured as
Enterprise value = PV(forecast FCF) + PV(terminal value)
Misused when
- Using terminal growth that is higher than the discount rate (invalid in perpetuity model).
- Treating a single scenario as a precise estimate (false precision).
Operator takeaway
- DCF is highly sensitive to discount rate and terminal assumptions; always run scenarios.
- Use free cash flow (cash) rather than accounting profit where possible.
- Tie DCF (Discounted Cash Flow) to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Quantify the impact with DCF Valuation Calculator if you need to turn the definition into an operating assumption.
- Read DCF valuation: forecast cash flows, discount rate, and terminal value if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
Where to use this on MetricKit
Calculators
- DCF Valuation Calculator: Estimate enterprise value using a simple DCF: forecast cash flows, apply a discount rate (often WACC), and add a terminal value.
- Equity Value Calculator: Convert enterprise value (EV) into equity value using cash, debt, and other adjustments (optionally per share).
- DCF Sensitivity Calculator: Estimate how enterprise value changes with discount rate and terminal growth assumptions (simple 3x3 sensitivity).
Guides
- DCF valuation: forecast cash flows, discount rate, and terminal value: A practical guide to DCF valuation and WACC discount rate choices: how to forecast FCF, choose a discount rate, and avoid terminal value traps.
- Equity value explained: EV to equity bridge, net debt, and adjustments: Use this guide to move from enterprise value to what belongs to shareholders. Learn the EV-to-equity bridge, which claims and adjustments matter, and how to avoid date mismatches or double-counting.
- DCF sensitivity guide: WACC, terminal growth, valuation: How to run a DCF sensitivity table, choose defensible WACC and terminal growth ranges, and judge whether valuation is robust.
- Valuation modeling hub: WACC, DCF, multiples, and equity value: A practical hub for valuation modeling: estimate a discount rate (WACC), run a simple DCF with sensitivity analysis, and translate enterprise value to equity value.