DCF
Discounted Cash Flow
Short definition
DCF discounts expected free cash flows at a rate that reflects risk. Use FCFF and WACC for firm value, FCFE and Ke for equity; do not mix them.
Detailed explanation
Explicit-period cash plus terminal value. Nominal cash with a nominal rate, real cash with a real rate. Interest is not deducted in FCFF.
The result is as fragile as assumed growth, margin, ΔNWC, capex and WACC. A large terminal share of EV means the model hangs on the long-term assumption — that is a diagnosis, not an error by itself.
Why it matters for the CFO
A multiple is the market’s summary; DCF is the firm’s cash claim. The CFO makes them talk on the same assumption set.
How it is calculated
EV = Σ FCFF_t / (1+WACC)^t + TV / (1+WACC)^n
Variables in the formula
- DCF: Discounted FCFF plus terminal value
How to read it
WACC +1 percentage point often cuts EV materially. WACC near g explodes terminal value; g < WACC is required.
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What to learn next
Definitions are educational. They are not investment, credit or tax advice.