Discounted Cash Flow (DCF) Modeling

Category: science

A valuation methodology used to estimate the value of an investment based on its expected future cash flows.

DCF modeling projects a target company’s free cash flows (FCF) over a multi-year horizon (typically 5-10 years) and discounts them back to the present day using the company’s Weighted Average Cost of Capital (WACC). This calculates the intrinsic Enterprise Value, independent of current stock market sentiment or temporary trading multiples.

Common Examples

• The corporate development team constructed a five-year DCF model to determine if the asset-management firm’s long-term cash flow justified the premium asking price.
• Small changes in the terminal growth rate assumption within a DCF model can cause massive swings in the final calculated Enterprise Value.