How to Build a DCF Model: Step-by-Step Guide (2026)

A Discounted Cash Flow model is the most fundamental valuation tool in finance. Whether you're preparing for investment banking interviews, analyzing a stock for class, or evaluating a potential investment, understanding how to build a DCF is essential.

In this guide, we'll walk through building a DCF model step by step using live data from a real company.

What is a DCF Model?

A DCF estimates the intrinsic value of a company by projecting its future free cash flows and discounting them back to present value. The core idea is simple: a company is worth the sum of all the cash it will generate in the future, adjusted for the time value of money.

The formula is straightforward:

Enterprise Value = PV of projected FCFs + PV of terminal value

Then subtract net debt and divide by shares outstanding to get intrinsic value per share.

Step 1: Project Free Cash Flows

Start with the company's most recent annual free cash flow (FCF). You can find this on the cash flow statement: operating cash flow minus capital expenditures.

Then apply a growth rate for each year of your projection period (typically 5-10 years). The growth rate should reflect:

Historical revenue and FCF growth trends

Industry growth rates

Company-specific factors (new products, market expansion, margin improvement)

For a mature company like Apple, you might use 5-8% FCF growth. For a high-growth tech company, 15-25% might be appropriate.

Step 2: Calculate Terminal Value

After your explicit projection period, you need to estimate the value of all cash flows beyond that horizon. This is the terminal value, and it typically represents 60-80% of total enterprise value.

The most common approach is the Gordon Growth Model:

Terminal Value = Final Year FCF x (1 + g) / (WACC - g)

Where g is the perpetual growth rate (typically 2-3%, aligned with long-term GDP growth).

Step 3: Determine Your Discount Rate (WACC)

The Weighted Average Cost of Capital blends the cost of equity and the after-tax cost of debt, weighted by the company's capital structure.

WACC = (E/V) x Ke + (D/V) x Kd x (1 - Tax Rate)

Where:

Ke (cost of equity) comes from the CAPM: Rf + Beta x ERP

Kd is the company's borrowing cost

E/V and D/V are the equity and debt weights

Most US companies have a WACC between 8-12%. Higher-risk companies (small cap, emerging markets, pre-profit) will have higher WACCs.

Step 4: Discount Everything to Present Value

Discount each year's projected FCF and the terminal value back to today using the WACC:

PV = FCF / (1 + WACC)^t

Sum all the present values to get enterprise value.

Step 5: Bridge to Equity Value

Equity Value = Enterprise Value - Net Debt

Intrinsic Value per Share = Equity Value / Shares Outstanding

Compare this to the current stock price. If your intrinsic value is higher, the stock may be undervalued.

Step 6: Sensitivity Analysis

No DCF is complete without a sensitivity table. Vary your two most important assumptions — typically WACC and terminal growth rate — to see how they affect the output. This shows the range of possible values and helps you understand which assumptions matter most.

Try It Yourself

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