# What Is DCF? Discounted Cash Flow in Plain English

> DCF discounts projected free cash flow to a value per share. Here's the formula, a $100 FCF worked example, and why the result is not a buy price.

Source: MarketCapLens — https://www.marketcaplens.com/learn/what-is-dcf
Updated: 2026-09-20

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 uses Gordon growth: last projected FCF × (1 + terminal growth) ÷ (discount rate − terminal growth).
- Value per share = (PV of FCFs + PV of terminal value + cash − debt) ÷ shares.
- Terminal growth must stay **below** the discount rate. Otherwise the terminal value is not defined.

## The formulas

> **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.

## A worked example

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](https://www.marketcaplens.com/tools/dcf-calculator). To see what explicit-period
growth a market price already assumes in this model, use the
[reverse DCF calculator](https://www.marketcaplens.com/tools/reverse-dcf-calculator).

## What DCF tells you

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.

## What DCF leaves out

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](https://www.marketcaplens.com/learn/what-is-a-pe-ratio), which uses earnings, and from
[enterprise value](https://www.marketcaplens.com/learn/market-cap-vs-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.

## Using it next to a live company

A company page such as [Apple](https://www.marketcaplens.com/company/AAPL) 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.

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*For general education only. Nothing here is investment advice.*

## Frequently asked questions

### What is discounted cash flow?

DCF grows last year’s free cash flow for a stretch of years, discounts those cash flows, then adds a terminal value. Cash is added and debt is subtracted, then the equity value is divided by the shares you type. Starting FCF of $100, 5% growth, 10% discount, 3% terminal growth, $50 cash, $20 debt, and 10 shares is about $163.19 a share in the MarketCapLens model.

### Is a DCF value a buy price?

No. It is the output of the assumptions you typed — growth, discount rate, terminal growth, cash, debt, and shares. A margin of safety haircuts that value; it is still a model number, not a recommendation.

### Why must terminal growth stay below the discount rate?

Terminal value in this Gordon growth model is next year’s cash flow divided by (discount rate minus terminal growth). If terminal growth is at or above the discount rate, that denominator is zero or negative and the value is not defined.