DCF: The Art of Future Guessing

A discounted cash flow model values a company by projecting the cash it will generate and discounting those flows back to present value.

The steps: forecast free cash flow for 5–10 years, estimate a terminal value beyond the forecast, discount everything by the weighted average cost of capital (WACC), then subtract net debt to get equity value.

The seduction of DCF is precision — a spreadsheet that spits out a number to the cent. The trap is the same. Small changes in WACC or terminal growth swing the answer wildly. The discipline is in stressing assumptions, not chasing decimals.

Use DCF to understand what assumptions the market is pricing in. Reverse-engineer a DCF from the current share price and ask: do I believe those numbers? That's often more useful than a forward DCF.