Discounted Cash Flow

What is Discounted Cash Flow

It is the fundamental method of valuation of a company in which the future cash flows of the company are discounted by the expected return to arrive at the present value of the company


Three things are important for DCF calculation

  • Cash flows of the Company
  • Expected rate of the analysts
  • Timeline of the cash Flows

These factors affect the valuation by DCF method in the following ways

  • Cash Flows- More the better
  • Expected return of the analyst- Less the better because we discount the cash flows by this rate
  • Timeline of the cash flows- Sooner the better

How to do valuation using DFC?


Most Common Free Cash Flow Definition:


Free Cash Flow to Equity = Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment

Free cash flow= EBIT(1-t) + Gross depreciation- Capex- Change in Working Capital

Calculating Cost of Capital


Cost of equity= rf+ (rm-rf)* beta

rf= risk free rate

Rm= market premium

Cost of Capital= wd*rd*(1-t)+ we*re

rd= cost of debt

re= cost of equity

wd= relative proportion of weight in the value of firm

we= relative proportion of equity in the value of firm


Beta can be calculated by un-levering the beta of the comparable company and then re-levering the beta for the subject company using its debt equity ratio. In our case Facebook has very minimum debt in its book and this is the same case with the majority of the social networking and internet giants, so we can directly take the average of the comparables to calculate the beta for Facebook.


In our LinkedIn model we have used DCF to calculate the present of the firm. The free cash to the equity has been discounted by the cost of equity to arrive at the value of firm


See the image below. In the formula you can see how the free cash flow to equity has been discounted to arrive at the value of the firm

DCF formula


You can download and see the complete e-book to understand DCF better. EduPristine’s extensive Financial Modeling course covers this aspect in detail. To know more, quickly write an email to .


You can also make different stages of DCF on excel. See the model below, you can also download the model.

DCF Stages

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