DCF Intrinsic Value Calculator
DCF Intrinsic Value Calculator
A two-stage discounted cash flow valuation: free cash flow grown for a set number of years, then at a steady rate for ever, discounted back to today, and compared with the market price.
Intrinsic value
Free cash flow $50 a share, growing 15% a year for 5 years, then 5% for ever, discounted at 12%; price $1,000
Two-stage discounted cash flow
- CF0
- last year’s free cash flow
- g1, N
- first-stage growth rate and its number of years
- g2
- the terminal growth rate, for ever; it must be below r
- r
- the discount rate. Margin of safety = (value − price) ÷ value.
Worked example
Free cash flow $50 a share, growing 15% a year for 5 years, then 5% for ever, discounted at 12%; price $1,000
Year 1–5 cash flows: 57.50, 66.12, 76.04, 87.45, 100.57
Worth today at 12%: 51.34, 52.71, 54.13, 55.58, 57.06; total $270.82
Terminal value in year 5 = 100.57 × 1.05 ÷ (0.12 − 0.05) = $1,508.52; today ÷ 1.125 = $855.97
Intrinsic value = 270.82 + 855.97 = $1,126.79, 76.0% of it from the terminal stage
Margin of safety at $1,000 = (1126.79 − 1,000) ÷ 1126.79 = 11.3%
Intrinsic value of the example, by discount rate and terminal growth
| Discount rate | Terminal 4% | Terminal 5% | Terminal 6% |
|---|---|---|---|
| 10% | $1,369 | $1,598 | $1,941 |
| 11% | $1,165 | $1,323 | $1,544 |
| 12% | $1,013 | $1,127 | $1,279 |
| 13% | $894 | $980 | $1,090 |
| 14% | $800 | $866 | $949 |
What a DCF can and cannot tell you
A share is worth the cash the business will generate for its owners, discounted for time and risk. A discounted cash flow model makes that literal: forecast free cash flow, the cash left after running and reinvesting in the business, and convert each future year’s amount into today’s money at your required return. This page uses the standard two-stage form set out by Aswath Damodaran: a first stage of faster growth for a set number of years, then a stable stage that grows at a modest rate for ever and is valued in one step with the Gordon growth formula. Discounting works the same way as on the present value calculator.
Match the cash flow to the rate. Free cash flow to equity, after interest and debt repayments, is discounted at the cost of equity and gives the value of the shares directly; leave net debt at 0. Free cash flow to the firm, before debt payments, is discounted at the weighted cost of capital and gives the value of the whole business; subtract debt less cash to reach the shares. Mixing the two is a common mistake that overstates value.
Sensitivity. In the example 76% of the value comes from the terminal stage, years nobody can forecast. That is typical, and it is why a DCF is only as good as two numbers: the discount rate and the terminal growth. The table shows the same business valued between $800 and $1,941 a share when each moves by a couple of points. Terminal growth must be below the discount rate or the formula breaks, and Damodaran’s rule is that it should not exceed the long-run growth of the economy the company operates in, since no company can outgrow the economy for ever. The page refuses a terminal rate at or above the discount rate rather than print a meaningless number.
Margin of safety. Benjamin Graham’s idea is to buy only when the price is well below your estimate of value, so that errors in the estimate do not turn into losses. The 11.3% margin in the example is small next to the range in the sensitivity table. For quicker cross-checks, compare with the P/E ratio calculator and the dividend yield calculator. This is arithmetic on the figures you enter, not financial advice.
Frequently asked questions
How do you calculate intrinsic value with DCF?
Forecast free cash flow, discount each year’s amount at your required return, add a discounted terminal value for the years after the forecast, subtract net debt and divide by the shares. In the example the value is $1,126.79 a share.
What is the terminal value in a DCF?
The value of all cash flows after the forecast period, assuming they grow at a steady rate for ever: next year’s cash flow ÷ (discount rate − terminal growth). It usually makes up most of the total.
Why can’t terminal growth be higher than the discount rate?
The formula divides by the discount rate minus the growth rate. At or above the discount rate the value becomes infinite or negative, which only means the assumptions are impossible. The page refuses it.
What discount rate should I use?
The return you require for the risk: a cost of equity for cash flows to shareholders, or a weighted cost of capital for cash flows to the whole firm. Try several and read the sensitivity table.
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References
- Damodaran A. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. 3rd ed. Wiley; 2012. Two-stage discounted cash flow models; terminal value by stable growth (Gordon) model; stable growth below the discount rate and not above the growth rate of the economy; FCFE at the cost of equity and FCFF at the cost of capital.
- Gordon MJ. The Investment, Financing, and Valuation of the Corporation. Irwin; 1962.
- Graham B. The Intelligent Investor. Rev. ed. Harper & Row; 1973. Chapter 20, “Margin of Safety” as the central concept of investment.