Learn Financial Modeling (1/5): Discounted Cash Flow statement (DCF) Methodology

1. What is a DCF model?

A discounted cash flow model ("DCF model") is a type of financial model that estimates the value of a business by forecasting its future cash flows and discounting them to arrive at a current, present value.

This is done by taking into account factors such as inflation, risk, and the cost of capital, as well as analyzing the company's future performance.

The discounted cash flows are then added together. The total represents the business's intrinsic value (equity value).

An illustration can be found on a stock's financial discounted cash flow page. Take Apple Inc., DCF for example:

Numerous companies compare DCF value to market value to determine whether something is over or under-valued. As illustrated in our example, Apple's DCF is 181.01, significantly more than its actual price of 148.69. As a result, the DCF recommends a BUY.

Thus, it is a critical evaluation method, and almost everyone in finance uses it to some extent. It's essential to keep in mind that the DCF comes with many different variations. There are two basic types: unlevered and levered.

Unlevered DCF is before debt repayment. You'll notice that we're discussing EBIT and EBIAT (which means it is before the payment of interest as well as debt pay down).

A levered DCF forecasts FCF after interest expense (Debt) and interest income (Cash), whereas an unlevered DCF forecasts FCF before interest expense and interest income.

A levered DCF model, on the other hand, attempts to value the equity component of a company's capital structure directly, whereas an unlevered DCF analysis attempts to value the company as a whole.

You can choose a stock to get the DCF from our homepage search box.

Next, we will start building our free cash flow statement to project our free cash flow for the next five years. Go to free cash flow build up.