The discounted cash flow model (DCF) is the canonical valuation framework in corporate finance. It is also the model most retail investors are afraid of, because finance courses teach it as a 200-row spreadsheet with detailed line-item forecasts and weighted average cost of capital derivations.
That is overkill for almost every retail use case. A defensible simplified DCF for screening purposes takes 10 lines of arithmetic, fits on the back of a napkin, and produces a result that is just as informative as the 200-row version, because the two inputs that matter most are the same in both: FCF growth and terminal value.
This post walks through the simplified DCF. We use Visa (V) as the worked example because it is a wonderful business with predictable cash flows, which is the easy case where DCF actually works.
What DCF actually does
A business is worth the present value of the cash you can extract from it over its lifetime. DCF estimates that present value in three steps:
- Project free cash flow for the next 10 years.
- Discount each year's FCF back to today using a discount rate (which represents your required return).
- Add a terminal value representing all cash flows beyond year 10, also discounted to today.
The total is the intrinsic value of the business. Divide by share count to get the per-share intrinsic value. Compare to the current price.
The 10-line simplified version
You need 5 inputs:
- Current free cash flow (FCF, found on cash flow statement)
- Expected FCF growth rate for years 1-10 (the hardest input; most uncertainty lives here)
- Discount rate (typically 8-10 percent for stable large-caps, higher for risky businesses)
- Terminal growth rate (typically 3 percent, capped at long-run GDP)
- Current share count (from the most recent 10-Q)
Then 10 lines of arithmetic:
Line 1: FCF year 1 = current FCF x (1 + growth rate)
Line 2: FCF year 2 = FCF year 1 x (1 + growth rate)
Line 3: ... (repeat through year 10)
Line 10: FCF year 10 = current FCF x (1 + growth rate)^10
Line 11: Sum of discounted FCF years 1-10 =
FCF year 1 / (1+r)^1 + FCF year 2 / (1+r)^2 + ... + FCF year 10 / (1+r)^10
Line 12: Terminal value at year 10 = FCF year 10 x (1 + terminal growth) / (r - terminal growth)
Line 13: Present value of terminal = Terminal value / (1+r)^10
Line 14: Total intrinsic value = sum of (11) + (13)
Line 15: Per-share intrinsic value = (14) / share count
That is the model. The two inputs that matter are FCF growth (input 2) and terminal value (computed from input 4). Everything else is mechanical.
Worked example: Visa (V)
We will use simplified illustrative figures appropriate for a screening DCF on Visa as of fiscal-year 2024 fundamentals.
Inputs:
- Current FCF (TTM): roughly 20 billion USD
- Expected FCF growth, years 1-10: 11 percent (Visa's 5-year FCF CAGR has been roughly 13 percent; we haircut for size and competitive pressure)
- Discount rate: 8.5 percent (Visa is investment-grade, but slightly above risk-free because of long-duration uncertainty)
- Terminal growth rate: 3 percent (matched to long-run global nominal GDP)
- Share count: roughly 1.95 billion shares outstanding
Year-by-year FCF projection:
| Year | FCF (USD billion) |
|---|
| 1 | 22.2 |
| 2 | 24.6 |
| 3 | 27.3 |
| 4 | 30.4 |
| 5 | 33.7 |
| 6 | 37.4 |
| 7 | 41.6 |
| 8 | 46.1 |
| 9 | 51.2 |
| 10 | 56.9 |
Present value of each year (discounted at 8.5 percent):
| Year | FCF | PV factor | PV (USD billion) |
|---|
| 1 | 22.2 | 0.922 | 20.5 |
| 2 | 24.6 | 0.850 | 20.9 |
| 3 | 27.3 | 0.783 | 21.4 |
| 4 | 30.4 | 0.722 | 21.9 |
| 5 | 33.7 | 0.666 | 22.4 |
| 6 | 37.4 | 0.613 | 22.9 |
| 7 | 41.6 | 0.566 | 23.5 |
| 8 | 46.1 | 0.521 | 24.0 |
| 9 | 51.2 | 0.481 | 24.6 |
| 10 | 56.9 | 0.443 | 25.2 |
Sum of years 1-10 present values: roughly 227 billion USD.
Terminal value calculation:
Terminal value at year 10 = 56.9 x 1.03 / (0.085 - 0.03)
= 58.6 / 0.055
= 1,065 billion USD
Present value of terminal value:
PV of terminal = 1,065 / (1.085)^10
= 1,065 / 2.261
= 471 billion USD
Total intrinsic value:
227 + 471 = 698 billion USD
Per-share intrinsic value:
698 billion / 1.95 billion shares = 358 USD per share
Visa's current price is roughly 320 USD. The simplified DCF says Visa's intrinsic value is in the neighbourhood of 358 USD per share, suggesting the stock is roughly 12 percent below intrinsic. Visa looks modestly cheap to fair at the current price on these assumptions.
The two sensitivities that matter
The DCF result is highly sensitive to FCF growth and discount rate. Here is the sensitivity grid:
| FCF growth | r = 7% | r = 8.5% | r = 10% |
|---|
| 9% | 386 USD | 322 USD | 274 USD |
| 11% | 432 USD | 358 USD | 303 USD |
| 13% | 484 USD | 399 USD | 335 USD |
A 2-percentage-point change in the FCF growth assumption shifts the intrinsic value estimate by roughly 12-14 percent. A 1.5-percentage-point change in discount rate shifts it by roughly 17 percent.
This is why DCF results are always a range, never a single number. The Visa example produces 274 USD to 484 USD across the assumption grid. The market price of 320 USD sits inside that range, which means the DCF tells you Visa is plausibly fair but does not give you a precise bargain signal.
The terminal value trap
A subtle point that catches almost every beginner: in our Visa example, 471 of the 698 billion intrinsic value (67 percent) comes from the terminal value. That is normal for DCFs of high-quality businesses; most of the value lives beyond year 10.
The implication is that the terminal growth rate matters enormously. Change the terminal growth from 3 percent to 4 percent and the terminal value jumps from 1,065 to 1,624 billion, raising total intrinsic value from 698 to 945 billion (a 35 percent increase from a 1-point change).
The discipline: never use a terminal growth rate above long-run nominal GDP (roughly 4-5 percent globally). A business cannot perpetually grow faster than the entire economy; eventually it would become the entire economy. Most defensible models use 2.5-3 percent.
When DCF works and when it does not
DCF is the right tool when:
- FCF is predictable across multiple years
- The growth runway is visible (not speculative)
- The business is not in secular decline
- The discount rate is grounded in observable interest rates plus a sensible risk premium
DCF is the wrong tool when:
- Earnings are deeply cyclical (commodities, autos, semiconductors during cyclical extremes)
- The business is pre-FCF or barely profitable (early-stage growth)
- The competitive position is rapidly changing (disrupted incumbents, fast-changing tech)
- Capital expenditures are lumpy (some industrials)
For wonderful, stable, predictable businesses (Visa, Mastercard, Microsoft, Coca-Cola, Johnson and Johnson), the simplified DCF works well. For everything else, supplement with other valuation methods.
Reverse-DCF: the trick most retail investors miss
A useful complement to the forward DCF is the reverse-DCF, which inverts the math: given the current market price, what FCF growth rate is the market implicitly assuming?
For Visa at 320 USD per share (market cap 624 billion), the simplified DCF math implies the market is pricing in roughly 9-10 percent FCF growth for the next decade. Compare to:
- Visa's 5-year FCF CAGR: 13 percent
- Visa's 3-year FCF CAGR: 11 percent
- Forward analyst consensus: 11-13 percent
The market's implied 9-10 percent is below historical and consensus. That is the source of the "modestly cheap" signal: the market is being relatively conservative on Visa's growth.
We walk through reverse-DCF in more detail at /blog/how-to-value-a-stock-2026/.
A 5-minute workflow
For any stock you are considering:
- Pull current FCF from the cash flow statement.
- Look up 5-year FCF CAGR; haircut by 2-4 percentage points for size and time.
- Use 8.5 percent discount rate for investment-grade large caps, 10 percent for everything else.
- Use 3 percent terminal growth.
- Run the 10 lines above.
- Run a 3x3 sensitivity grid (growth +/- 2 percent, discount rate +/- 1.5 percent).
- Compare the range of intrinsic values to the current market cap.
If the market cap sits comfortably below the centre of your intrinsic value range, the stock is plausibly cheap. If it sits above, it is plausibly expensive. If it is inside the range, it is fair to mildly stretched.
Where invest-like fits
Every stock page on invest-like at /buffett/[ticker]/ surfaces a computed DCF and reverse-DCF. The assumptions are visible and the user can adjust the growth rate and discount rate on the fly. The Buffett-Fit Score's Valuation pillar uses owner earnings yield as the primary signal (more sector-stable than DCF) but the DCF provides an independent cross-check.
For the broader valuation triangulation across all four methods (DCF, owner earnings yield, PEG, Graham number), see /blog/how-to-value-a-stock-2026/ and /blog/how-to-calculate-intrinsic-value-without-a-finance-degree/.
Disclosure
Educational tool. The Visa example uses approximate fundamentals as of fiscal-year 2024 and is illustrative. Actual DCF inputs evolve quarterly. DCF results are estimates, not predictions, and depend on assumptions about future growth that may or may not hold.
Author: Zaid Ghazal, founder of invest-like, Kiel, Germany. Not a registered investment adviser. Full methodology at /methodology/.