The Five-Step DCF Process
Every DCF, from a back-of-envelope to a 5,000-row model, follows the same five steps. Learn the map before the details.
- ✓Recite the five steps of a DCF in order
- ✓Explain why terminal value is a separate step
- ✓Identify which step each later module deepens
A DCF can look intimidating, but the workflow never changes. Hold this map in your head and every formula later will have a home.
- Project free cash flow for an explicit period (~5 years), driven by revenue, margins, , and working capital.
- Calculate WACC - the that reflects the riskiness of those cash flows.
- Determine terminal value - the value of all cash flows after the explicit forecast (you can't forecast forever).
- Discount everything to present value using .
- Sum to an NPV and sensitize - that sum is your ; then stress-test the key assumptions.
Forecasting individual years beyond ~5 is guesswork. Instead we let the model run to a '' and capture everything beyond it in a single terminal value. In most DCFs the is the majority of total value - often 70%+ - so it deserves real care (Module 6).
The rest of this track maps cleanly onto these steps: Modules 4–5 are step 1 (cash flows), Module 6 is step 3 (), Module 7 is step 2 (), and Module 8 turns the resulting into a share price.
A DCF is only as good as its assumptions. Beautiful mechanics on top of a careless revenue forecast produce a confident-looking but meaningless number. Respect the inputs.
In a typical DCF, roughly how much of total value comes from the terminal value?
Lock it in by building it yourself in a live, graded spreadsheet.