Our DCF Calculator is a powerful tool for stock valuation, helping investors determine the intrinsic value of a company based on projected future cash flows. By inputting key financial metrics, you can evaluate whether a stock is undervalued or overvalued.

This essential tool aids in making informed investment decisions and assessing a company’s long-term potential.

DCF Calculator for Stock Valuation

DCF Calculator for Stock Valuation

ⓘ Enter the expected cash flow for the first year.
ⓘ Enter the expected cash flow for the second year.
ⓘ Enter the expected cash flow for the third year.
ⓘ Enter the expected cash flow for the fourth year.
ⓘ Enter the expected cash flow for the fifth year.
ⓘ Enter the discount rate.
ⓘ Enter the number of the company's outstanding shares.
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Show additional input options
ⓘ Enter the terminal value of the company.
ⓘ Enter the growth rate for the terminal value.

Explanation of technical terms

Cash Flow Year 1 to Year 5: Enter the projected cash flows for each year. These are the net cash inflows the company expects to generate, typically derived from the company’s financial forecasts or historical performance. You can find these figures in financial reports or business plans.

Discount Rate (%): Enter the discount rate to account for the time value of money. This rate often reflects the company’s weighted average cost of capital (WACC) or the desired rate of return. You can find this information in the company’s annual report or financial analysis documents.

Number of Outstanding Shares: Enter the total number of common shares currently held by all shareholders. This includes shares held by institutional investors and insiders. You can find this data in the company’s balance sheet or on financial websites under the company’s profile.

Terminal Value (optional): Enter the estimated terminal value, which represents the business’s worth beyond the explicit forecast period. This is often calculated using growth perpetuity or exit multiple methods. Look for this value in detailed financial projections or strategic analyses.

Terminal Value Growth Rate (%, optional): Enter the expected growth rate for the terminal value, which estimates the rate at which the company is expected to grow indefinitely. This rate is typically based on industry trends or long-term company strategies, and you can find it in financial forecasts or economic reports.

Discounted Cash Flow (DCF) Valuation: Formula and Explanation

The Discounted Cash Flow (DCF) method is a fundamental approach to valuing a company based on its projected future cash flows. This valuation technique discounts these cash flows to their present value, providing an estimate of the company’s intrinsic value.

The core principle behind DCF is the time value of money: a dollar today is worth more than a dollar in the future due to its potential to earn interest.

The DCF Formula

The basic formula for calculating the DCF value is:

\(DCF = \sum_{t=1}^{n} \frac{CF_t}{(1 + r)^t} + \frac{TV}{(1 + r)^n}\)

Where:

  • DCF: Discounted Cash Flow
  • CFt: Expected cash flow at time t
  • r: Discount rate (or required rate of return)
  • n: Number of periods in the projection
  • TV: Terminal Value

Key Components

1. Cash Flows (CF)

These represent the net amounts of cash the company is expected to generate in each period. They are typically derived from financial statements or estimated based on forecasts.

2. Discount Rate (r)

Also known as the required rate of return, this factor represents the return an investor demands for the risk associated with the investment. It’s often calculated using the Weighted Average Cost of Capital (WACC).

3. Terminal Value (TV)

This represents the company’s value beyond the explicit forecast period. It’s often calculated using the Gordon Growth Model:

\(TV = \frac{CF_{n+1}}{(r – g)}\)

Where:

  • CFn+1: Cash flow in the first year after the forecast period
  • r: Discount rate
  • g: Long-term growth rate

Practical Example

Let’s consider a company with the following projected free cash flows over the next five years: $50,000, $60,000, $70,000, $80,000, and $90,000. Assume a discount rate of 10% and a terminal value of $1,000,000 at the end of year 5.

DCF Calculation:

\(\begin{aligned}DCF &= \frac{50,000}{(1 + 0.10)^1} + \frac{60,000}{(1 + 0.10)^2} + \frac{70,000}{(1 + 0.10)^3} + \frac{80,000}{(1 + 0.10)^4} + \frac{90,000}{(1 + 0.10)^5} + \frac{1,000,000}{(1 + 0.10)^5} \end{aligned}\)

Result:

\( \begin{aligned}
DCF &= 45,454.55 + 49,586.78 + 52,631.58 + 54,566.31 + 55,513.12 + 620,921.32 = 878,673.66 \end{aligned}\)

The estimated intrinsic value of the company is approximately $878,673.66.

Conclusion

The Discounted Cash Flow method is a powerful tool for company valuation as it incorporates future earnings potential and the time value of money. By applying DCF analysis, investors can make informed decisions and determine the fair value of stocks. However, it’s important to note that the accuracy of DCF valuation heavily depends on the quality of input assumptions and projections.

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