Discounted cash flow, or DCF, asks what a stream of future free cash flow is worth in today’s dollars. You grow last year’s cash flow for a stretch of years, discount those amounts, then add a terminal value for everything after. Divide by the shares you type and you have a value per share — the output of those assumptions, not a buy price.
Key takeaways
FCF in year t = starting FCF × (1 + growth)^t
Terminal value = FCF_n × (1 + terminal growth) ÷ (discount rate − terminal growth)
Value per share = (PV of FCFs + PV of terminal value + cash − debt) ÷ shares
Cash flows land at each year-end. The discount rate is the rate you type, not a figure loaded from the ranking. Shares are typed too — this model will not invent a share count from a market-cap snapshot.
Start with $100 of free cash flow. Grow it 5% a year for 5 years. Discount at 10%. Use 3% terminal growth, $50 of cash, $20 of debt, and 10 shares.
The model value is about $163.19 a share. A 20% margin of safety is that number times 0.8, about $130.55 — still a haircut on a model, not a bid.
Run the same inputs in the DCF calculator. To see what explicit-period growth a market price already assumes in this model, use the reverse DCF calculator.
It translates a cash-flow path and a discount rate into a present value. Change growth, the discount rate, or terminal growth and the value moves. That sensitivity is the lesson.
The result is only as honest as the inputs. Growth that never shows up, a discount rate that is too low, or terminal growth that is too high will inflate the number. The model does not know about taxes, dilution after the share count you typed, or whether the business can actually compound.
It is a different lens from P/E, which uses earnings, and from enterprise value, which is a snapshot of the whole firm rather than a projection. None of them is a recommendation.
If terminal growth is at or above the discount rate, stop. Do not “fix” the formula by flipping a sign. The calculator leaves the result blank.
A company page such as Apple can show cash on the balance sheet and a live price. It does not invent free cash flow, a discount rate, or shares for this model. Type those yourself, and treat the output as a reading of your assumptions.
For general education only. Nothing here is investment advice.