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Why Use Discounted Cash-Flow (DCF) Models?

When a company’s capital spending, working-capital swings and debt are observable—as they are for most manufacturers, retailers and tech firms—the cleanest way to price the business is to project its free cash flow to the firm (FCFF) and discount it at the weighted-average cost of capital (WACC).

Both DCF variants here follow the same five-step flow:

  1. Project FCFF for each forecast year.
  2. Discount each FCFF back to today at WACC rate.
  3. Add a terminal value (see options below) to arrive at enterprise value (EV).
  4. Convert to equity:
    Equity Value = EV + Cash & Equivalents - Total Debt
  5. Divide by shares outstanding to get the intrinsic price per share.

Discounted Free Cash Flow – Perpetuity

Estimates terminal value by projecting FCFF to grow at a constant, sustainable rate beyond the forecast period—ideal for mature, steady-state businesses.

Discounted Free Cash Flow – Exit Multiple

Sets the terminal value by applying a market EV/EBITDA multiple to the final forecast year’s EBITDA.

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Intrinsic Valuation
An intrinsic valuation model calculates a value per share by using company intrinsic data and will not be influenced by market price or any pricing multiples.

Discounted Cash Flow to Firm - Perpetual Growth

Discounted Cash Flow to Firm - Perpetual Growth

This model estimates the fair value of a share by discounting projected Free Cash Flow to the Firm (FCFF), also known as Unlevered Free Cash Flow.

The terminal value assumes cashflow grows at a constant Growth in Perpetuity rate forever.

Learn more: Prof. Aswath Damodaran's Guide to Discounted Cash Flow Valuation

Earnings Power Value

Earnings Power Value

This model is only available with a paid subscription plan.

Earnings power value is a method of valuing the stocks of a company, assuming that the current earnings are sustainable, and there is no future growth.

The model was developed by Columbia University Professor Bruce Greenwald, a renowned financial economist and value investor who, through this valuation technique, tries to overcome the main challenge in discounted cash flow (DCF) analysis related to making assumptions about future growth, cost of capital, profit margins, and required investments.

Simple Dividend Discount Model

Simple Dividend Discount Model

This model estimates the value of companies that have reached maturity and pay stable dividends as a significant percentage of their free cash flow to equity, with no share buybacks or high growth expectancy.

Learn more: Prof. Aswath Damodaran's Guide to Dividend Discount Models

Simple Excess Return Model

Simple Excess Return Model

This model is used to estimate the value of companies that have reached maturity and earn stable excess returns with little to no chance of high growth.

Note: Excess return models are better suited for estimating the fair value of financial companies compared to enterprise valuation models, such as the Discounted Free Cash Flow Model.

See Valuing Financial Service Firms

Two-Stage Dividend Discount Model

Two-Stage Dividend Discount Model

This model is only available with a paid subscription plan.

This model is designed to value the equity in a firm, with two stages of growth.

  1. An initial period of high growth, represented by the Sum of discounted dividends.
  2. A subsequent period of stable growth, represented by the Discounted terminal value per share.

Learn more: Prof. Aswath Damodaran's Guide to Dividend Discount Models

Two-Stage Excess Return Model

Two-Stage Excess Return Model

This model is only available with a paid subscription plan.

This model is used to estimate the value of companies based on two stages of growth:

  1. An initial period of high growth, represented by the Sum of discounted excess returns.
  2. A subsequent period of stable growth, represented by the Discounted terminal value.

Note: Excess return models are better suited for estimating the fair value of financial companies compared to enterprise valuation models, such as the Discounted Free Cash Flow Model.

See Valuing Financial Service Firms
Multiples Valuation
A multiples valuation model combines both company intrinsic data and market price multiples.

Discounted Cash Flow to Firm - Exit Multiple

Discounted Cash Flow to Firm - Exit Multiple

This model estimates the fair value of a share by discounting projected Free Cash Flow to the Firm (FCFF), also known as Unlevered Free Cash Flow.

The Exit EV/EBITDA Multiple is applied to the company’s projected EBITDA in the final forecast year to estimate the terminal Enterprise Value (EV).

Learn more: Prof. Aswath Damodaran's Guide to Discounted Cash Flow Valuation

Discounted Future Market Cap

Discounted Future Market Cap

This model estimates the intrinsic value of a common share by projecting the future market capitalization using the estimated P/E ratio, then discounting it to the present using an annual required rate of return (referred to as the discount rate).

Peter Lynch Fair Value

Peter Lynch Fair Value

This model is only available with a paid subscription plan.

Peter Lynch Fair Value applies to growing companies. The ideal range for the growth rate is between 10% and 20% a year.

It is computed by multiplying PEG Ratio, which according to Peter Lynch should always equal to 1 (so it can be ignored), EPS LTM, and Earnings Growth Rate. The resulting model value shows whether the company is currently trading at its fair value or not.
Risk Analysis
A risk analysis model provides information about the level of risk in a company, the cost of capital, liquidity ratios, margins and other risk related ratios.

Altman Z-Score

Altman Z-Score

This model is only available with a paid subscription plan.

The Altman Z-score is a formula for determining whether a company, notably in the manufacturing space, is headed for bankruptcy.

Read more: Altman’s Z-Score Model

Beneish M-Score

Beneish M-Score

This model is only available with a paid subscription plan.

Beneish’s M-Score is a mathematical model that uses eight financial ratios weighted by coefficients to identify whether a company has manipulated its profits.

Read more: Beneish M-Score

Capital Asset Pricing Model (CAPM)

Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model describes the relationship between risk and expected return for assets, particularly stocks. Its formula is used to calculate the cost of equity, or the rate of return a company is expected to pay to equity investors.

Margin Analysis

Margin Analysis

Margins refer to the ratio between a financial report item and the revenue (example: Net Income Margin = Net Income / Revenue).

This analysis provides annual and quarterly sections for reporting key financial margins.

Piotroski F-Score

Piotroski F-Score

This model is only available with a paid subscription plan.

The Piotroski score, also known as the Piotroski F-score, is a discrete score that ranges from 0 to 9 and reflects nine criteria that are used to gauge the strength of a firm’s financial position.

Read more: Understanding Piotroski Score

Return on Invested Capital (ROIC)

Return on Invested Capital (ROIC)

The return on capital or invested capital in a business attempts to measure the return earned on capital invested in an investment.

Read more on Aswath Damodaran - Return Measures PDF

Shiller PE (CAPE) Ratio

Shiller PE (CAPE) Ratio

This model is only available with a paid subscription plan.

The CAPE Ratio (also known as the Shiller P/E or PE 10 Ratio) is an acronym for the Cyclically-Adjusted Price-to-Earnings Ratio.

Read more about the CAPE Ratio

Weighted Average Cost of Capital (WACC)

Weighted Average Cost of Capital (WACC)

WACC is a financial metric that helps in calculating a firm’s cost of financing by combining the cost of debt and cost of equity structure together.

Read more: Understanding WACC

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