DCF values a company by estimating its future cash flows and discounting them back to today's value using a discount rate (reflecting risk and time value of money).
Formula (simplified):
DCF Value = Σ [ Future Free Cash Flows ÷ (1 + Discount Rate) t ]
Advanced Twist: Multiple Scenarios
You don't just use one set of assumptions — you test several to see how sensitive the valuation is to changes.
Example Scenarios:
| Scenario | Growth Rate | Discount Rate | Terminal Growth | DCF Result |
|---|---|---|---|---|
| Base Case | 6% | 9% | 2% | $85/share |
| Optimistic Case | 8% | 8% | 2.5% | $110/share |
| Pessimistic Case | 3% | 10% | 1% | $60/share |
This helps with stress testing — seeing how value changes under different economic or business conditions.