DCF (Discounted Cash Flow)
DCF (Discounted Cash Flow) values a business as the present value of its future free cash flows, discounted at the cost of capital (WACC). It is the foundational intrinsic-value methodology used by analysts, M&A bankers, and value investors. Form
DCF (Discounted Cash Flow) values a business as the present value of its future free cash flows, discounted at the cost of capital (WACC). It is the foundational intrinsic-value methodology used by analysts, M&A bankers, and value investors.
Formula: EV = Σ ( FCFt ÷ (1 + WACC)t ) + Terminal Value ÷ (1 + WACC)n. Equity value = EV − Net Debt.
INR example: A consumer-staples company projects free cash flows of ₹200 cr, ₹220 cr, ₹240 cr… for years 1–5, terminal growth 4%, WACC 11%. Terminal value (Gordon growth) = FCF6 ÷ (WACC − g) = ₹260 ÷ (11% − 4%) = ₹3,714 cr. PV of FCFs + PV of terminal ≈ ₹3,200 cr enterprise value. Subtract net debt to get equity value, divide by shares for fair value per share.
When to use: For stable, cash-generative businesses with predictable margins (FMCG, IT services, utilities). Avoid pure-DCF for early-stage tech, deeply cyclical commodity plays, or businesses with negative FCF — small input changes cause huge swings.
SEBI note: SEBI’s Research Analyst Regulations (2014) require analysts to disclose valuation methodology and key assumptions in research notes. Never anchor on a single DCF point estimate — always show sensitivity to WACC and terminal growth.
Related terms: IRR, Free Cash Flow, Enterprise Value (EV).