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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:
- Project FCFF for each forecast year.
- Discount each FCFF back to today at WACC rate.
- Add a terminal value (see options below) to arrive at enterprise value (EV).
- Convert to equity:
Equity Value=EV+Cash & Equivalents-Total Debt - 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.
Why Use Dividend Discount Models?
This company pays out dividends, so valuing the share as the present value of future dividends can give some insight into the stock's intrinsic value.
Simple Dividend Discount Model
Use when the firm is already mature and dividends grow at a steady, sustainable rate.
Value ≈ next-year dividend ÷ (cost of equity − perpetual growth).
Two-Stage Dividend Discount Model
Use when the firm still has a finite high-growth window before settling into steady payouts.
- Discount each dividend expected during the high-growth years.
- Add the discounted value of a perpetuity that starts once growth stabilizes.
