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: how to bridge from enterprise value without mixing terms: Use this guide when your DCF or multiples output is EV but the decision you care about is what belongs to shareholders. It shows the EV-to-equity bridge, which balance-sheet items matter, and where analysts commonly double-count or mismatch dates.
- DCF sensitivity analysis: how WACC and terminal growth move valuation: Use this guide when a single DCF output looks too precise. It shows how to build a WACC vs terminal growth grid, choose defensible ranges, and judge whether a valuation is robust enough to use in a decision.
- 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.