Advanced Finance

Discounted Cash Flow End to End

Build a complete DCF the way it is built in practice (free cash flow, WACC, terminal value, equity bridge) and learn where every one of the six standard errors hides.

  • Advanced
  • 8 min total
  • 12 chapters

What decision this helps you make: What a business is worth on its own cash flows, how much of that answer is actually an assumption about the year after the forecast ends, and how wide the honest range is.

What this topic is

A discounted cash flow model forecasts the cash a business produces for all of its capital providers, discounts each year at the weighted average cost of capital, adds a terminal value for everything beyond the forecast, and bridges from enterprise value to equity value by subtracting net debt.

Why it matters

DCF is the only mainstream valuation method that values a business on what it will produce rather than on what someone else paid for something similar. It is also the method that most easily produces a precise number built on assumptions nobody stress-tested. That is why knowing where its weight actually sits matters more than knowing the formula.

Who should learn it

Analysts, CFOs, acquirers, and business owners who need to build, defend, or take apart a valuation model rather than accept the number on the last page of the deck.

What you will understand

  • Build unlevered free cash flow from EBITDA, correctly, line by line
  • Construct a WACC from CAPM and market-value weights, not book weights
  • Compute terminal value both ways and cross-check each against the other
  • Bridge enterprise value to equity value and read an honest sensitivity range

Prerequisites

Common misconception

"The DCF says the business is worth $153.5M." No model says that. In the worked example in this lesson, moving the discount rate one point and the terminal growth rate half a point in each direction, both entirely defensible moves, takes the answer from $130M to $189M. And roughly 71% of the value sits in a terminal value derived from a single year that is five years away. A DCF is a structured argument about assumptions, and the number at the bottom is the least interesting output it produces.